* China challenges Germany as world's top solar producer
* Rise has come from large-scale parks, not on roofs
* Subsidies, falling costs make rooftop solar more attractive
By Adam Rose
BEIJING, Dec 8 (Reuters) - China may be on the verge of finally cracking the crucial urban and suburban solar market thanks to a new funding model that allows buyers to have panels installed for free.
The world's largest producer of photovoltaic panels has built massive solar farms in the country's deserts, but a disappointing take-up of solar power in cities and industrial hubs has meant the country has fallen well short of official targets.
Even as China is set to overtake Germany as the country with the world's highest installed solar capacity, growth in small-scale solar such as rooftop panels has been so weak that planners didn't even bother setting new targets this year for installations under 20 megawatts (MW) in size.
But the arrival of third-party financing models, already popular in the United States, could help China unlock the potential of solar like Germany and Japan, where rooftop panels helped to boost capacity and bring record levels of renewable energy into the power mix.
"The options today in China are a lot better than they were 12 months ago," said Ross Allan, director of business administration at Dulwich College, Suzhou, an international school which is considering installing panels.
China wants to boost solar capacity from 28 gigawatts (GW) in 2014 - roughly 2 percent of the country's total power capacity - to 100 GW by 2020.
But interest from households and businesses has been muted due to high installation costs, difficulties acquiring rooftop rights, limits on leases in a country where all land belongs to the state, and relatively low returns for selling excess power into the grid.
Small-scale installations accounted for just 17 percent of China's installed solar capacity at end-2014, compared with at least 70 percent of capacity in Germany, according to the country's Federal Network Agency.
Thanks to subsidies and falling manufacturing costs, however, a burgeoning industry to fund and install photovoltaic (PV) panels in small-scale projects has begun to emerge that offers the chance to go green with little upfront cost.
Small-scale solar could rise to a third of total capacity in just five years with the help of such funding models, said Frank Xie, senior analyst with IHS in Shanghai.
"Third-party financing is really critical to the sustainability and the viability of the China PV market," Xie said.
Singapore-based real estate investment firm Redwood Group, which has carpeted its Japanese warehouses with rooftop panels, has recently launched a 248-kilowatt (KW) pilot project in China, where it owns more than half a million square metres of roof space.
Redwood signed a power purchase agreement with New York-based solar developer UGE International and its financing partner, Hong-Kong's Blue Sky Energy Efficiency Co.
Under the Redwood deal, UGEI and Blue Sky lease rooftop space from Redwood to operate solar panels and then sell the electricity back to Redwood, the building owner, at prices below grid rates.
While Redwood's energy cost savings are small - initially in the hundreds of dollars a year - the 20-year deal also allows it to hedge against rising utility prices.
"The time is right now for solar on rooftop in China because the cost of putting a system on the roof is becoming much more attractive," said Tianyu Sieh, chief executive of Blue Sky.
UGEI and Blue Sky have also partnered with global real estate services firm Jones Lang LaSalle in China to offer the same model to its portfolio of commercial clients.
"The benefits are going to be around avoided capital, reduced costs, or cost predictability, branding benefits," Matthew Clifford, the head of Energy and Sustainability Services for North Asia at Jones Lang LaSalle, said.
"China is the latest where we've got a really good business case."
While the third party-funding model encourages businesses to install enough power to meet their own needs, a low feed-in tariff still discourages adding extra panels to sell power back to the grid.
To make rooftop panels ubiquitous, a higher feed-in tariff might be needed to copy the model in Japan and Germany.
"We can put solar panels on the roof sufficient to service our own needs," Redwood's China Construction Director Colin Clark said. "But really we could do so much more." ($1 = 6.3981 Chinese yuan renminbi) ($1 = 122.9400 yen)
Editing by Henning Gloystein and Richard Pullin