Startup Sun Run Generation thinks it knows how to tap into the potentially huge residential solar market - sell solar power, not panels.

The approach reduces the upfront cost of solar, which has been an obstacle in markets where homeowners are accustomed to paying a smaller monthly electric bill instead of thousands of dollars at once. Even though the solar-power systems might pay for themselves over the years, it's difficult for residential customers to come up with the whole upfront cost.

San Francisco-based Sun Run, which came out of stealth mode Tuesday at the Solar Power 2007 conference, has taken the idea from the commercial solar market.

For years, companies like MMA Renewables and SunEdison have bought solar-energy equipment in exchange for a contract to sell the electricity back to their commercial customers at a set price.

The commercial market's larger projects made it a prime target for the so-called power-purchase-agreement model, but bringing that model to the residential market - where the small-scale equates to extra work, like paperwork and decentralized solar maintenance - has proven difficult.

So how does Sun Run plan to succeed? Instead of taking on the whole upfront cost, California customers would pre-pay $16,000, less than half the average $35,000 price tag, after $13,000 worth of federal tax credits and state rebates. Sun Run pays the rest and owns the system, charging homeowners a fixed rate of 13.5 cents per watt, for a 5-kilowatt system, for 20 years.

Homeowners aren't risking any capital because they get that guaranteed electricity price, said Nat Kreamer, co-founder and chief operating officer at SunRun. Sun Run also handles the system's maintenance, he said.

The company, bootstrapped by management so far, launched in January and started business in September. So far, Sun Run has retrofitted four family homes in California with its solar-financing and service model.

On Tuesday, the company also announced a supply partnership with installation company REC Solar. Details beyond comarketing were scarce.

Kreamer said he first started pondering the idea for Sun Run in 2005 while working on an energy project for California Gov. Arnold Schwarzenegger's office and the state's Department of Water Resources.

But it was put on hold when, as a member of the Navy Reserves, he was deployed to Afghanistan with the U.S. Special Forces in 2006.

"There is nothing like a war to clarify what you want to do with your life," he said. "To me, the clear answer was I don't want to be in a resource war, or a war that is financed by resources," he said.

Shortly after his return, Kreamer, along with former Blackstone investor Edward Fenster, started Sun Run.

Other companies, such as Wilmington, Del.,-based Citizenre also have tried to develop innovative approaches to bringing solar into homes without a huge upfront cost. But the company has yet to deliver.

Peter Liu, founder and vice chairman for New Resource Bank, said the sheer magnitude of the potential for residential solar makes the idea attractive. "The last time I pulled up Google Maps, there were a lot more roof tops over residential and small commercial spaces," he said.

"I guess it's probably worth testing," said Peter Liu, referring to Sun Run.

He compared the model to the one used in the automotive industry, where customers who used to pay a down payment now often only pay monthly. "You just bring your driver's license and you walk out with a car and a [monthly] payment," he said.

In Sun Run's case, customers might have to be retrained to get used to the idea of paying part of the price, Liu said. "The consumer financing world has evolved toward no money down," he said.

Tags: blackstone, citizenre, mmarenewables, newresourcebank, recsolar, sunedison, sunrun