The Escalator Trap

A very common claim is that PG&E rates have gone up 6.7% over the past 30 years, so any escalator below that means your savings will actually increase year after year. Then the salesperson might propose a ďsafeĒ escalator like 5%, and youíll see their spreadsheet display an immediate 20% or more savings in your own energy bill. Itís hard not to sign-up!

The problem is that PG&E rates have not increased 6.7% over the past 30 years. They DID increase 6.7% in the 30 years from 1970 to 2001, but the typical homeowner's bill increased only 2.9% from 2001 to 2010. And the rate for the expensive tier 4/5 electricity has actually dropped over the past five years.

Whatís going to happen over the next twenty years? No one knows. But if your salesperson says that rates increased 6.7% over the past 30 years, heís a liar, or uneducated. Either way, keep an eye on your silverware, and think twice before signing any agreement he presents.

That said, whatís the big deal about agreeing to a 5% escalator versus a 3%? On the one hand, Iím OK with it, as long as the decision-maker completely understands the nature of compounding.

Letís look at the numbers. Imagine a twenty year, $200/month lease, raised once every 12 months by 5% versus 3%.

monthly payment

5%

3%

year 1

200

200

year 2

210

206

year 3

221

212

year 4

232

219

year 5

243

225

year 6

255

232

year 7

268

239

year 8

281

246

year 9

295

253

year 10

310

261

year 11

326

269

year 12

342

277

year 13

359

285

year 14

377

294

year 15

396

303

year 16

416

312

year 17

437

321

year 18

458

331

year 19

481

340

year 20

505

351

In year 15, one lease costs ~$400 each month, the other ~$300 each month. I’ll argue that that’s not even a deal-breaker. The purchaser did the math, and understood that, down the road, he would be paying more. And that brings-up what’s missing from this simple spreadsheet: the savings given in year 1, to encourage prospects to consider that higher escalator. If the 3% escalator means a $200/month bill in year 1, then the higher escalator by definition means a lower bill initially. Since this calculation is done by the leasing company, and changes probably every week or so, let me just make up a discount, and have the contract with the 5% escalator start at $180:

monthly payment

5%

3%

year 1

180

200

year 2

189

206

year 3

198

212

year 4

208

219

year 5

219

225

year 6

230

232

year 7

241

239

year 8

253

246

year 9

266

253

year 10

279

261

year 11

293

269

year 12

308

277

year 13

323

285

year 14

339

294

year 15

356

303

year 16

374

312

year 17

393

321

year 18

413

331

year 19

433

340

year 20

455

351

In this example, the homeowner with the 5% escalator pays less for the lease for the first six years. If times are tight, yet he expects that they’ll get better, this may be a rational move.

I see one problem with higher escalators: it’s going to be hard to sell your house if the escalator means the new owner will be required to spend more for the lease than the value of the electricity it's producing.

next page: Can I Sell my House, if I have a Lease?

Should I Lease a Solar Panel System?
 
Who Should I Lease From?
 
Are Some Leasing Companies Better than Others?
 
Leasing versus Buying
 
How Much Can I Save if I Lease Solar?
 
Explain the Different Variables in a Lease
 
The Escalator Trap
 
Can I Sell my House, if I have a Solar Lease?
 
So... Should I Get Solar, Using a Lease?
 
x

 
Quiz: Can you explain this solar lease promotion?
 
Understanding a Solar Proposal
 
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Assorted Lease Companies' Web Pages:
 
- BrightGrid
 
- Solar City
 
- Solar Universe
 
- SunCap Financial
 
- Sungevity
 
- SunPower
 
- SunRun
 
- Vivint Solar
 
 

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