Are solar leases the answer to affordable solar systems?

As prices for solar panels have come down in the last decade, solar leases may not be as attractive an option as they once were.

In the past, solar panels were restricted to those with sun-bathed roofs and the resources to purchase equipment that was often too expensive for average consumers. To help make solar accessible to more people, installers started offering solar leases and power purchase agreements (PPAs) that enabled people to have solar installed with little to no upfront cost and pay a monthly amount that still helped them save on energy bills. But in the past decade or so, prices for solar panels have come down considerably, making system purchases—whether for cash or through a loan—more common. But financing options like leases have remained viable options to put solar power systems within reach of more consumers and have helped expand the adoption of solar energy.

In this article, we discuss what a solar lease is, how it differs from a PPA, the advantages and disadvantages of a lease, and provide a glossary of key terms that are important to understand when deciding whether to lease your solar panels. Hopefully, this article will help you determine whether a solar lease is right for you.

Solar lease vs. Solar PPA

You probably associate the term “lease” with cars, or maybe with a lease for a place to live. A lease agreement means that you pay a set amount every month, and for that amount you get access to the product, property, or service you need.

Since you don’t own the vehicle or place to live, maintenance is usually the responsibility of the owner, whether that’s a landlord or car company. It also saves money upfront since you aren’t obligated to pay the entire cost of the vehicle or home when you receive the keys.

Solar leasing works in a similar fashion. You get solar panels installed on your roof and pay a set price per month, which can allow you to save between 10% and 30% on your monthly electrical bills. Maintaining the system is the responsibility of the company that leased you the panels.

One of the advantages of leasing solar panels is that you can often get a system installed with little or no money down, saving you the upfront investment costs. Leases for solar panels typically last between 20 and 25 years, which matches the typical lifespan of a system. In general, solar leases cost between $50 and $250 a month depending on the size of the system and power output.

In contrast, under a solar PPA arrangement, you pay for the actual amount of electricity you use at a set price per kilowatt-hour (kWh). In most cases, that price is lower than what you’d pay your utility per-kWh. Because the amount of electricity you use will change month to month, the amount you pay each month with a PPA will also change monthly.

Choosing between a PPA and a solar lease is really a matter of how you prefer to pay your electricity bills. As we noted, with a PPA your payment amount will fluctuate month to month. But if you average out the payments under a PPA for a full year, they should roughly be the same as the set amount you would pay under a solar lease.

If you’d rather budget the same amount each month for your electricity payments, a lease may be right for you. However, a PPA may more accurately reflect how much electricity you use each month. No matter which payment option you choose, the savings compared to your current utility costs will be similar. Plus, you gain more control over your electricity production, rather than relying on a company that prioritizes its shareholders over its customers.

Solar lease vs. Solar loan

Solar leasing became more popular when solar loans with higher interest rates were out of reach for most people. When solar panels were more expensive, leasing a solar system made more sense because they allowed consumers to avoid expensive investments upfront. The prices for solar panels have dropped nearly 70% in the past 10 years, so to install a solar electricity system isn’t as expensive as it used to be. Even now, it still costs between $12,000 and $14,000 to install a solar power system in the United States, after the 30% federal solar tax credit is applied.

However, with solar system prices now lower, it might make more sense to get a solar loan to install the system on your roof. Once the loan is paid off, your return on investment will be much higher compared to leasing a system for 20 or more years. Once the lease term ends, you typically have two options: either have the system removed or purchase it outright at its current market value at that time.

Like home-equity loans, solar loans provide homeowners a way to finance their solar system without putting down tens of thousands of dollars upfront. Like a solar lease, you have a fixed amount to pay every month on the loan, with the added benefit of owning the system once the loan is completely paid off. One disadvantage of taking out a loan is that you are then responsible for maintenance and performance monitoring, but many repairs will still be covered by your hardware and installer warranties.

What terms you should know

While solar lease agreements differ depending on which provider you use, there are certain terms that are frequently used across all lease agreements. Here’s a list of the most common terms:

Net energy metering (NEM): Net energy metering is a billing mechanism that credits solar energy system owners for the excess electricity their systems produce and they export back to the grid. Your solar system may generate more electricity than your home uses during daylight hours. The excess goes back into the grid and you get a bill credit that goes toward energy you use from the grid after the sun sets. You’re billed for your "net" energy use over the course of the year. On average, only 20% to 40% of a solar energy system’s output goes back into the grid, and this exported solar electricity helps serve your neighbors’ loads.
Annual escalator: This provision, included in most lease agreements, allows your provider the right to increase your payments at the beginning of each year of the lease. For a typical solar lease, the escalator usually runs between 1% and 5%.
Term length: Like any lease, you’re committing to make payments to the provider over a specific period. As noted earlier, residential leases typically have terms of 20 to 25 years, while commercial solar leases are generally more flexible. They can range between 7 and 20 years, depending on how the lease is written.
Performance and maintenance: One big advantage of solar leasing is that monitoring performance and providing maintenance falls to the service provider instead of the homeowner or business owner. For the duration of the lease, the leasing company will ensure the system operates properly and will provide regular maintenance as needed to ensure the system operates at peak performance. But, in general, solar panels don’t require much ongoing maintenance outside of keeping them clean, though, depending on the type of system, some of the system components may need regular attention or possibly replacing to keep the system functioning properly.
Monitoring: In most cases, the solar leasing company will allow you to monitor your system performance through a free portal you can access from your computer or smartphone. This enables you to see what your system is producing, how what you’re paying compares to what you’d be paying for the same amount of grid power and can alert you if maintenance is needed.
Buying the system: Like auto leases, most solar leases give you the option of purchasing your system at various points during the agreement. Typically, the purchase price is laid out in detail in the agreement at the beginning. This essentially lets you “try before you buy” to determine if solar panels are right for you. Once you purchase the system, however, monitoring and maintenance become your responsibility, so make sure you’re willing to take those on before converting your lease. But you also get the benefit of greater savings each month if you own your system outright.
Selling your home: Leasing your solar system can allow you to include the solar system in the selling price of your home, either by transferring the lease to the next owner directly or (as discussed above) purchasing the system and including it in the purchase price. To transfer the lease, the home buyer may need to pass a credit check, but generally if they can get a mortgage, the credit check shouldn’t be a problem.
At the end of the term: Generally, you have three options at the end of your solar leasing term. One, you can purchase the system outright. Two, you can end the lease and have your provider remove the system from your home. Or third, if your provider allows it, you can leave the system in place and sign a new leasing agreement, so the arrangement continues as before.

Should you lease your solar system?

The strongest pitch for solar leasing is that you don’t have to pay for the system installation upfront, instead paying for them over time through a set payment. While this arrangement made sense when interest rates were high and panels were more expensive, that’s less the case now. Interest rates, though still a bit high, are still relatively low compared to historic levels. And the prices for solar modules themselves have never been lower.

If you don’t qualify for the federal solar income tax credit (just about anyone who pays federal income tax will get some benefit from the credit though) or don’t have the credit score necessary to get a solar loan, leasing may still make sense for you if you’re determined to go solar. But if possible, paying for your panels with a solar loan provides more savings for most people in the long run. After all, a solar loan lets you own the system. It makes it easier to include as part of future home sales, and once the system is paid off, the electricity it generates is essentially free. And with utility rates continuing to rise, your savings will increase too.

However, the quality of the equipment and brand warranty still matter, even with a lease or power purchase agreement (PPA). While the leasing provider is responsible for maintenance, if the system underperforms or breaks down, the homeowner could be left without power or savings. Repairs and replacements may not happen quickly, potentially leading to unexpected energy costs.

Don’t make any decisions, however, without getting installation quotes from several local installers. This will give you more options and help you decide what solar financing method works best with your budget and your long-term housing plans.

What you need to know:

A solar lease lets you install a system without the upfront cost. Instead, you pay a set monthly price that pays for the electricity generated, performance monitoring and maintenance. For some, solar leasing is a hassle-free way to get solar panels on their property.
In exchange for your monthly payment, you’ll receive all the power the solar panels produce, which will be credited on your utility bill through a process called net energy metering. Net metering credits solar energy system owners or lessees for the excess electricity they export back to the grid.
One of the significant advantages of a steady lease payment is that it helps you budget each month and should lower your electricity bills (typically between 10% and 30%). In addition, the performance monitoring and maintenance responsibilities fall to the panel provider instead of you.
Solar leases typically last 20 to 25 years, at the end of which you can either buy your system outright, end the lease and have the panels removed, or recommit to a new lease agreement for a set period of years.
While leasing became popular when solar systems were more expensive, now the leasing model is less attractive since solar system costs have dropped significantly. Other solar financing options may make more sense in today’s market. It pays to explore all your options, including taking out a solar loan.
Even though many solar leases are billed as offering free solar panels because there’s no upfront cost, they fall short in terms of lifetime savings compared to owning the system outright.
In most cases, leasing solar panels only makes sense if you don’t qualify for the federal solar tax credit or aren’t ineligible for a solar loan. But finding another financing method like a home-equity loan, still makes much more sense than a lease economically.
If you have a high enough credit score to get a solar loan, it’s often a more efficient, effective way to pay for your solar panel system. It improves the long-term value of the system and keeps the federal tax credits and other solar incentives in your pockets instead of going to the leaseholder.
Don’t make any decisions on financing your system without getting multiple quotes. This ensures you get the best price for your system and will allow you to make the best decision on your financing options.