Solar Leasing Guide: Should You Lease or Buy? (2021)
Solar power is among the most affordable renewable energy options, whether for businesses or homes. Companies that provide solar products are everywhere these days, but to take advantage of the benefits of solar energy, homeowners are faced with a major decision: solar leasing vs. buying panels outright.
A solar lease is a long-term contract between a customer and a solar panel provider. For homeowners seeking to fulfill their energy needs without high utility bills, but who don't have the upfront capital to buy a system, solar leasing can seem like a viable option. In this article, we'll take a look into whether a solar lease is actually a smart investment.
Disclaimer: This article is for informational purposes only. It should not be relied on for and is not intended to provide accounting, legal or tax advice.
What is Solar Leasing and How Does it Work?
Solar leasing is a financing option through which customers pay a monthly fee for the panels and get to use the power the system produces. They do not, however, own the panels. It is an arrangement similar to leasing a car — the idea is to provide a convenient option for those who want to go green and reduce their electricity bills without the overhead of buying a solar energy system.
There are a few benefits to solar leasing. First, it reduces a customer's upfront costs to install panels. Using a solar lease means the maintenance and liability to damaged panels rests on the solar company rather than the homeowner. However, because you do not own the panels, you miss out on incentives like local and federal tax credits.
Typical solar leases last for 20 years, and they include a solar lease escalator that increases the monthly installment once per year based on current market prices and the energy landscape. Many solar leases come with the option to buy the solar panels at a discounted rate at the end of the lease agreement (again, similar to a car).
Solar leasing was especially important in the early days of solar when systems were more expensive, but as the cost of solar panels has decreased, leasing doesn't make as much sense as it used to.
How Leasing Differs from a Solar Power Purchase Agreement (PPA)
In many ways, solar leasing presents a competitive option compared with a solar power purchase agreement (PPA). For solar leasing, customers pay monthly rent for the panels; with a PPA, customers instead pay per kilowatt-hour (kWh) of energy generated. In other words, the amount customers pay for a solar lease is determined based on the capacity of the panels, while solar PPAs are paid based on the actual generation. This difference means that those with solar leases will have a more fixed price, benefit more during the sunny summer months and save even more money in the long run from reduced energy bills.
While both solar leasing and solar PPAs are contracts by which the customer doesn't actually own the solar panels, the specifics of costs, reliability, savings and more differ and require consideration by the individual building owner.
Typical Terms of a Solar Lease
The terms of a solar lease are critical to understanding whether it's the right route for you. Based on individual requirements, solar leasing companies can provide various lease terms, ranging from short to long periods. Typically, though, solar leases last 20 to 25 years. Given that solar panels have an average lifespan in the range of 25 to 30 years, customers end up being able to utilize solar panels to their full lifetime potential.
Different solar leasing companies will also offer opportunities for advanced services, including monitoring, payment and observation through mobile and web apps. Included in these digital offerings are online portals through which customers can review their contract, make monthly payments and observe usage over time. As with the wider utility sector, solar customers are looking to choose companies with improved service and customizable solutions, all of which provide a better user experience.
Customers must also be aware that, typically, solar leases will require an annual payment escalator of 1 to 5% per month as a result of inflated electricity costs. These terms are spelled out clearly in the contract, though, so they should not come as a surprise.
Ending Your Solar Lease
Customers who choose to lease solar panels may find themselves in circumstances where they want to end their lease, such as if they are moving to a new home. Solar leasing companies try to make this process as easy as possible, providing the option to transfer the lease to the new owners of the home or break the contract and remove the panels.
Even if you don't break your lease early, it will come to an end eventually. When this happens, customers can either renew the same lease or cease the solar contract. In the latter instance, the solar company will dismount and remove the panels. A last option is that customers can purchase the solar panels at a discounted rate (a price that is sometimes outlined in the contract at the time of the original solar lease).
Is a Solar Lease Right for You?
The decision of whether to lease solar, buy solar panels outright, engage in a PPA or simply ignore solar as an option is a very personal and major decision. To help with such decisions, here are a few pros and cons of solar leasing to keep in mind:
Pros of Solar Leasing
Solar leasing comes with many natural benefits, including the following:
- No need to pay high upfront costs of solar panel installation
- Locks in energy prices for the future, when the market may be volatile
- Avoid the headache of maintenance and monitoring of equipment
- Significant utility bill savings
- Reduced household carbon footprint
- Power production guarantees in solar leases mean payments can decrease if the panel doesn't produce as anticipated, minimizing the risk
Cons of Solar Leasing
Solar leasing is certainly not for everyone, though, as these contracts can come with a certain level of risk and concern as well:
- As utility rates increase, the leasing price also increases each year and could undercut expected cost benefits.
- Since you do not own solar panels, you are not entitled to the federal solar tax credit or local benefits.
- Although there isn't a high upfront cost, over the system's lifetime, you'll likely end up paying an equivalent or higher amount than what you would have if you bought the solar panels outright.
- Leased solar panels don't add value to your property like panels you own do, because they are not a part of the property you own.
- Breaking your lease may be a hassle if you wish to move.
Leasing Solar Panels Vs. Buying Solar Panels
Earlier generations of solar panels were expensive, so leasing them was a more obvious choice. But the past decade has seen the cost of solar panels plummet, shifting that calculus and making it more accessible and profitable to outright own your own solar system.
The main difference between solar leasing and buying solar panels comes down to ownership. If you buy a solar system, you own it, and that means you are liable for its maintenance and operation costs. If you lease a solar panel, however, the company providing you with this option is the true owner and must shoulder this load.
Buying a solar panel is the best option when you want to make the most of the potential financial benefits. These economic advantages include reduced state taxes through investment credits, government rebates (sometimes up to 30%), and added Solar Renewable Energy Credits. Additionally, owning solar panels increases the market value of a property. So while solar leasing can be profitable over the lifetime of the contract, customers who have the ability to buy the systems outright will receive more financial benefit.
Solar leasing, however, is the best option when you wish to just use the electricity produced by the solar panel as a source of clean energy. Although you do not own the panels and are not entitled to any tax benefits from the state, you can still enjoy the financial benefits of solar energy without the high installation costs, ever-present risk of needing to repair damage and more.
In case of buying solar panels, if you do not have the cash to pay upfront, top solar companies provide plenty of options to finance them rather than only leaving solar leasing as an option:
- Financing through solar installer: Many installers partner with lenders to provide lower-interest solar financing to their customers.
- Getting a PACE loan: Also known as an R-PACE loan, Residential Property-Assessed Clean Energy loans are long-term, low-cost options to fund your solar purchase. This type of loan attaches the cost of the panels to your property tax bill through a special tax assessment.
- Getting a standard bank loan: Solar loans can be secured through credit unions, banks, utilities or state programs. In certain cases, you can choose an on-bill financing option, in which the loan is repaid through your monthly electric bill with your utility provider. With this option, part of your monthly utility savings can be put toward your loan payment.
Frequently Asked Questions: Solar Leasing
What is a solar lease?
A solar lease is a long-term (usually 20-year) contract that allows a company to install a solar system on your roof without you purchasing the system. You pay monthly installments and annual price surges in exchange for the energy produced by these panels.
Is a solar lease worth it?
A solar lease may be worth it for people who do not wish to take up the hassle of maintaining solar panels or who tend to move every five to 10 years. Solar leasing may also sound beneficial to customers who cannot pay a huge amount upfront. However, there are significant financial downsides, including not being eligible for the 26% federal solar tax credit.
Why is leasing solar a bad idea?
The monthly payments you make toward a solar lease will typically increase year over year due to a price escalator that accounts for inflation. Because of this, it's likely you will end up paying an equivalent or greater amount than you would have paid if you were buying solar panels outright. Leased solar panels don't add value to your property, and contract cancellations can be a hassle if you are trying to sell your house before your lease is up. Further, because you are not the owner of the panels, you are not entitled to any financial incentives or tax rebates.
What happens after a solar lease is up?
Solar leasing tends to extend up to 20 to 25 years, which is about the average lifespan of solar panels. Once your lease is up, you have the option to either renew it, discontinue the services and get the panels removed, or buy the panels from the solar vendor at a discounted market rate.
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