Leasing Solar Systems versus Owning
Leased solar, commonly known as third-party owned solar has earned attention as an alternative to purchasing. Despite historically low solar panel costs, the cost of installing a PV system still leads some homeowners to consider leasing solar panels instead of owning them. But leasing solar panels is not always a smart option. One thing for sure is that the stock market loves it when you take on a solar lease, just as much as when you lease a car, or any other large piece of equipment. Especially in incentivized state such as California. The leasing companies however, take all the advantage of the incentives, putting that money into their pockets immediately by paying for the equipment outright and banking on a 10 – 20 year lease payment from the homeowner.
Still, many homeowners are curious about the differences between leasing a home solar system and buying one out right. There are advantages and disadvantages to either method. Here is a look at how leases work and the pros and cons of leasing vs owning.
First of all, how does solar panel leasing work?
When homeowners lease solar systems, they actually buy electricity from a company who owns the solar panels installed on their roof. The price a lessee pays may be significantly lower or the same to what the utility company would charge for electricity. The homeowners can sometimes lock in this rate over the term of the lease, or see their lease payment increase at a slightly lower percentage year over year to what the TPO “thinks” the utility rates will do. These are called escalation and de-escalation clauses.
Some companies like Sungevity and SunRun are third-party financers, and they don’t actually install the solar system. Instead, they contract with local contractors to have the panels installed onto the roof. Others are companies like SolarCity actually handle both the financing and installation. In both these cases, we have found that installer has a lower vested interest in doing the job well and are more interested in the total volume of installs they can do as the leasing companies pay a significantly lower price per watt for the labor than what an installer can charge if they were do a system with that homeowner directly.
Solar leasing terms vary considerably, and they usually allow homeowners to start their solar leasing program with no money down. Leasing contracts are available in increments of twenty, fifteen or ten years, where homeowner’s are given the option to buy the system, if not, fully own the system outright at the end of the lease. Many of these companies continue to offer ongoing maintenance of the system, however with the solar, aside from warranty issues with the product themselves, maintenance is pretty low. With leasing in its infancy, and most warranties on inverters being around 5 - 10 years (the shortest warranty period of any of the equipment), we have yet to see how the maintenance contracts will play out. In the case of roof leaks, many of these companies have clauses that exclude roof damage as part of their contract, especially on a roof that is pre-existing and not being re-roofed at the time of install.
In which states can homeowners find solar leasing programs?
Solar leasing contracts can be found in 13 states (there could be more now): Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Oregon and Texas. It’s also available in Washington D.C. Homeowners need to know that solar leasing, coincidentally, is only available in locations in these areas that offer measurable state, local or utility rebates. In California, for example, TPO systems account for 74% of residential solar installations state wide.
The PROS (and in our opinion, these are pretty weak arguments):
Four Reasons to Consider a Solar Lease:
1. Leasing doesn’t come with the same upfront costs that buying does. Most homeowners who consider solar installation are worried about the upfront costs. Although terms vary based on one’s credit rating, local or state incentives and the solar capacity of one’s home, solar leasing usually allows people to go solar without putting any money down. This is one way for consumers to access solar energy who otherwise wouldn’t be able to put down the investment capital. And since fewer American homeowners have equity now than in the past, home equity loans that were once easy to obtain aren’t always available to finance solar installations.
2. Leasing doesn’t come with maintenance costs. When something malfunctions, lessees tied into a lease aren’t responsible. Repairs, maintenance and replacement are the responsibility of the solar leasing company. For example, if a panel underperforms on delivering adequate power supply, or an inverter fails, or comes up for end of life replacement after ten years; it’s the solar lessor who promises and pays under warranty. Considering this costs a few thousand dollars, leasing can provide the financial peace of mind free from maintenance and uncertainty. However, as mentioned previously, we have yet to see the maintenance clauses play out with many leasing companies. Also, all installers of purchased systems and those components carry the same coverage and warranty’s and a simple call to the manufacturer can get replacement equipment on its way, and most reputable installers include the labor to replace failed equipment as part of their contract.
3. Leasing may cost less for energy verses the utility company. Some leases allow consumers to lock in static pricing on electricity rates for a decade or longer. But again, this is a gamble.
4. Leasing allows you some choice in how you design your lease terms. Some leasing products allow you to choose how much money you want to put down toward the lease, as well as the escalation rate.
As mentioned earlier, when you lease solar panels, you surrender many of the advantages that come with buying solar panels. Instead of enjoying solar tax credits and rebates, those benefits will go to the owner of the solar installation, or the leasing company. So will the rights to earn and sell renewable energy credits. One of the primary advantages of solar power is independence from the utility company. By installing rooftop or ground-mounted PV arrays, homeowners are able to generate their own electricity even selling electricity back to the utility company, in some cases. Leasing solar panels creates another binding monthly payment for homeowners.
A typical 5kw system begins paying for itself immediately. In California, a 5kw solar installation can pay for itself in as little as 5 years through lower electricity bills, rebates & incentives, tax breaks and other cost recovery methods.
Six Reasons to Opt for the Outright Purchase of Solar:
- Buying can be a better economic bet. Solar leasing companies are in business to turn a profit from the leases they sell. They pocket the rebates and incentives, and use escalation and de-escalation options in order to better hone the leasing instrument into a financially rewarding investment for themselves. The longer the lease agreement, the more they profit, and the less economic sense it may make for the consumer. Solar leases aren’t a poorly crafted or unscrupulous device by themselves and if used correctly. The key to staying ahead of the potentially negative consequence of a solar lease is to assess your situation with a level financial analysis. For the cost of a $250 feasibility study, you can hire an energy consultant-solar broker to help you compare the pros and the cons relative to your unique situation. Have them perform the lease verses purchase test, and then decide.
- Buying panels provides flexibility. Lease contracts might specify a certain installation size, but when owners purchase their own system, they aren’t bound by details of equipment or power production. This is really beneficial locally, with tiered billing. A lot of times a homeowner can design a system to knock out the over baseline usage, which maximized return on investment and minimizes the size of the system.
- Leasing Solar Panels Creates Debt. When you purchase a solar system, you’re adding value to your home. A leased solar panel system, on the other hand, creates a debt liability that may need to be passed on to a homebuyer.
- A solar purchase may add value to a pre-existing home. Homeowners who are going to move in the next few years probably shouldn’t consider buying or leasing a solar panel installation. However, if consumers sell their home after they’ve benefited from the installation after several years, the money that they’ve invested may allow them to raise the asking price and compete more effectively against those home sellers who do not have a solar installation.
- It might be easier to sell your home without a lease. In a real estate market that is already weak for home sellers, leasing solar panels creates another obstacle to a home sale. And in some cases, the new homeowner may have to pay a hefty fine to break the lease agreement you entered into with your solar provider. According to some real estate professionals, solar leases may present a potential slowdown or a threat to the sale of a home. Some homebuyers may not want to deal with taking over an existing lease. They may have other ideas for how they want to shop for solar, or they may not have the credit to qualify to take over a solar lease within the same terms. The leasing company becomes another entity that you have to negotiate with during the purchase of the home, and they have the power to alter or increase the lease payment, lengthen the term, etc. at the time that ownership changes.
- Some solar leases will not let you pay down or pay off your system early. With more leasing options becoming available, it is wise to check out the terms and conditions. Some have reportedly 20 year contracts, while others let you pre pay or pay off the system in 7 years.
In the end it comes down to what each individual consumer deems valuable to himself or herself. Whatever the reason it is clear to us that those homeowners, who can make the financial investment up front, will have a clear Return on Investment (ROI). As we mentioned earlier “buyer beware” there are clear advantages and disadvantages to either direction you choose.