How does a solar lease work?
Solar leasing is a solar financing option where you choose a solar service provider and sign a lease with them. The solar company installs and maintains the solar system at your home and then sells you the electricity produced at a pre-determined monthly rate. Think of leasing a car - this model reduces the initial cost to the customer, but you don't own the product you're paying for!
Solar leases typically run for 20-25 years, and many allow you to purchase the solar system at a discounted rate at the end of the lease. However, if you want to end the contract early, there are still expensive fees, which can outweigh the savings from going solar.
In the early days of solar energy, systems were more expensive. According to the US Energy Information Administration (EIA), many homes and businesses have chosen to go solar this way as the solar leasing model has become more popular. By 2023, more than 2 million residential and commercial buildings in the US will have installed leased solar systems. However, the falling cost of solar panels has impacted the solar leasing market. Leasing no longer makes as much sense as it once did, and you can easily find affordable solar panels on the market.
Power Purchase Agreements (PPA)
Power Purchase Agreements (PPA) are another form of solar panel leasing. Instead of paying a fixed rent for each solar panel, you only pay for the amount of electricity used. You pay for each kilowatt hour (kWh) of electricity you use each month, and your bill will fluctuate accordingly. These payments are much lower than monthly loan or lease payments and have no repayment period. They also tend to have the longest terms, between 20 and 25 years.
Unfortunately, PPAs are only available in some states. According to the Database of State Incentives for Renewable Energy and Energy Efficiency (DSIRE), fewer than 30 states allow the use of PPAs, and even those that do impose restrictions on the terms of the PPA, including limitations on the size of the solar system.
Is it better to lease or buy solar panels?
Buying solar panels is a long-term investment. The federal government offers a 30% tax credit to individuals who install a solar system on their residential property, and if you install a $20,000 solar system, you can receive a $6,000 tax credit. In addition, many state and local governments offer incentives such as cash rebates, tax credits, and reduced building permit fees.
Buying a solar panel system outright gives you the benefit of immediate ownership of the system without having to worry about interest on the loan. However, it also means that you are responsible for the full cost of the system, including equipment, installation, and maintenance.
Difference between leasing and buying solar panels
| Leasing | Buying | |
| Ownership | Owned by a third party | Owned by buyer |
| Initial cost | No or low upfront cost | High upfront cost |
| Long-term cost | High long-term cost | Low long-term cost |
| Tax credit | Not eligible | 30% tax credit |
| Flexibility | None | Self-management |
| Payments | Monthly payments | Multiple financing options |
| Maintenance | Maintenance covered by lease | Maintenance covered by buyer |
Top pros and cons of solar leases
|
Advantages |
Disadvantages |
|
Saves money on electricity |
Savings are lower than with a solar loan or cash purchases |
|
No upfront costs |
Unavailability of federal solar tax credits and other state and local incentives |
|
May be an attractive feature to some home buyers |
Complicates selling your home |
|
No maintenance responsibilities |
Leasing companies sometimes neglect their maintenance responsibilities |
|
Faster qualification and access to solar leases |
The sale of your home can be difficult |
Solar leasing offers several benefits to people who want to install solar systems:
- No upfront costs: one of the key benefits of solar leasing is that there are virtually no upfront costs - just one monthly payment. This makes it easier for more customers who don't have the funds to buy a system outright to go solar.
- Electricity savings: You can use the electricity generated by the solar panels, saving money on your electricity bill throughout the term of the agreement.
- No maintenance responsibility: Solar leasing companies are usually responsible for installing and maintaining the solar system during the lease period. This removes the maintenance responsibility from the customer.
- Quick and easy approval: It is often easier and quicker to qualify for a solar lease than a solar loan.
- Cleaner energy: Leasing a solar system helps the environment by reducing your carbon footprint and promoting clean, renewable energy.
However, there are still some problems associated with leasing solar.
Why solar leasing is not recommended?
We've summarised the average return on investment for buying, financing, or leasing a solar system. As you can see from the graph below, both borrowing and buying solar systems with cash can deliver high returns, while leasing is significantly lower. What is the cause of this gap?
The real cost of a solar lease
Solar leasing doesn't cost much upfront, but is it a better deal?
- Long-term costs: While solar leasing reduces the initial investment, in the long term the cost of leasing can exceed the total cost of purchasing a solar system. This means you could end up paying a higher total cost than if you had bought the system, and you won't own the solar system when the lease ends.
- Potential rent increases: In solar leases, which may include a rent adjustment mechanism, the rent may increase over time, known as automatic escalation. This means that each year your monthly payments will be higher, reducing your potential savings. According to EnergySage, buying solar panels typically saves homeowners around 40-70% on their energy bills; leasing solar panels can save 10-30%.
Choosing to finance your solar system with a loan will yield a significantly higher return on investment than opting for a solar lease. Solar loans do not include annual interest rate escalations. When you secure a solar loan, your monthly payments remain consistent throughout the loan period.
Tax credits and financial incentives
If you choose to lease rather than buy solar, you're only giving up the 30% federal solar tax credit and other state incentives. These incentives account for around 45% of the total cost of the solar system (which belongs to the leasing company, not you). As a result, there are long-term benefits to buying a solar system. Owning a solar system will increase the value and marketability of your home.
If you can't afford to buy solar, we recommend you take out a loan to pay for it. Financing your system may also qualify you for the federal Solar Investment Tax Credit (ITC). This can save you thousands of dollars that you would lose on a lease.
Difficulty in selling houses
Leasing solar panels may make it more difficult to sell your home than owning them. Leasing solar panels does not add value to your home. Mainly because leased solar panels do not remain with the home when it is sold, potential buyers may be concerned about future leases and costs. Future lease payments, the quality of service from the leasing company, and the restrictions of the lease are all factors that can deter some buyers and make the selling process more complicated and time-consuming.
If you have the financial means, we recommend that you buy the solar system outright or consider other financing options. However, if you're looking for a low-maintenance, turnkey solution and want to start saving money from day one, solar leasing may be the right option for you.
How to choose a solar lease company?
You can compare the structure and model of different companies before you consider signing a contract with them for the next 20 years. We have researched the differences between several prominent solar lease providers in the US and summarised what you should look out for.
Business models
A good solar leasing company will be able to offer a full range of services, including system design, installation, maintenance, and monitoring. They should also be able to communicate well with their customers to ensure that their needs are being met. In most cases, some companies will promise you savings on your electricity bill in the first year.
Key products
When choosing a solar leasing company, you need to understand the performance and quality of the main products they offer. Determining the type, specifications, and features of the system will help you assess whether the system meets your needs and desired results. The difference is that most companies consider financing from the outset, while others start as equipment manufacturers or installers.
Do you sell solar leases directly?
Some solar leasing companies sell solar leases directly, while others may offer them through partners or third parties. Understanding the company's distribution model can help you determine your relationship with them, as well as how to communicate with and support them.
Do they have their installers?
Some companies have a team of installers who are experienced and professionally trained to ensure the system is installed correctly and efficiently. Other companies may use local installers to complete the installation. Ensuring that the company has an experienced installation team can help you avoid problems that may arise during the installation process.
Do they manufacture solar panels?
Most solar leasing companies do not manufacture solar panels and buy them from other suppliers.
Get out of a solar lease
Although installing solar panels can save you money, you may want to cancel your solar lease for several reasons. For example, if you move house or decide that the system isn't the right size for you. If you want to cancel during the term of your solar lease, you may find that there are large early termination fees hidden in the contract. Although this is less common now, you should be aware of these charges if you are planning to enter into a lease. You have several options other than terminating the agreement:
Assign the lease to the new homeowner: Some solar companies have specialists in assigning leases.
Buy out the solar lease: You can prepay the balance of the lease and remove or keep the solar panels. Most solar leasing companies will include the buy-out period and price in the agreement.
Purchase the solar system at market value: Some leases may not specify a purchase amount, but rather state that a professional appraiser will determine the purchase price based on fair market value. You'll need to consider how long your system will be in use and current market conditions. Remember that your solar system is a power-generating asset, unlike an item that depreciates over time, such as a car, so the purchase cost may be higher.
FAQ
Q: How much is a solar lease per month?
A: The cost of a solar lease per month can vary depending on several factors, including the size of the system, your location, the specific terms of the lease agreement, the amount of electricity the system is expected to generate, and any additional services included in the lease. On average, solar lease payments typically range from around $50 to $250 per month.
Q: what happens if I stop paying my solar lease
A: This is clearly stated in the lease documents. If you stop paying your solar lease, there are several possible consequences: interruption of solar power, removal of the solar system, and demand for payment (the leasing company goes to court). This could affect your credit rating, making it harder for you to get loans or credit in the future.
Q: Do you get a tax credit for leasing solar panels
A: In the United States, if you lease solar panels instead of purchasing them outright, you typically do not qualify for the federal Investment Tax Credit (ITC) directly. The leasing company retains ownership of the solar panels, which means the tax credits and incentives associated with their solar system belong to them.
Q: What happens if I die before paying off my solar lease?
A: If you die before your lease ends, the lease may transfer to your spouse. If you're not married, your estate may have to pay off the lease obligation, unless you've named a specific beneficiary to take over the lease.
