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 the no-brainer they once were.

In the past, solar panels have been seen by most people as a niche market, restricted to those who had access to sun-bathed roofs and could afford equipment that was often too expensive for average consumers. But in the past decade or so, prices for solar panels have come down considerably, and financing options to put them on your roof have proliferated. A solar lease is one such financing option that can put solar panel systems within reach of more consumers than ever before and has democratized the way solar electricity is distributed.

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

Solar Lease Vs. Solar PPA

Think of the first time you heard the term “lease.” Maybe it was in connection with a car, or perhaps you associate lease payments with apartments. What that meant was 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, items like maintenance are usually the responsibility of the owner, whether that’s a landlord or car company. It also saves money upfront since you are not obligated to pay the entire cost of the vehicle or home when you receive the keys.

Solar leasing works in a similar fashion. You pay one set price per month and get solar panels installed on your roof, which can allow you to save between 10% and 30% on your monthly electrical bills. Maintaining the system is the responsibility of the company from whom you’ve leased 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 reflects the typical lifespan of a system. In general, solar leases cost between $50 and $250 a month.

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). Most consumers are familiar with this model because it is the one typically used by current monopoly utilities.

Choosing between a PPA and a solar lease is really a matter of how you prefer to pay your electricity bills. If you average out variable payments under a PPA, they should roughly mirror the set amount you would pay under a solar lease. If you prefer to be able to budget the same amount each month for your electricity payments, a lease may be right for you. Operating under a PPA arrangement, however, may reflect how much electricity you use more precisely. No matter which payment option you consider, the savings over what you’re paying to your current utility will be about the same—and you get to control your own electricity production instead of leaving that to a corporation whose loyalty lies with their shareholders, not their end users.

Solar Lease Vs. Solar Loan

Solar leasing became very popular when solar loans seemed out of the reach for most people. After all, installing a solar electricity system is not inexpensive. Generally, it will cost between $14,000 and $16,000 to install a system in the United States, after the federal solar tax credit is applied.

When solar panels were expensive, leasing your solar panels made a lot of sense because they allowed consumers to avoid expensive investments upfront. As prices for solar panels have dropped nearly 70% in the past 10 years, however, it may make more sense to take out a solar loan to install the system on your roof instead.

Like home-equity loans, solar loans provide homeowners a way to finance their solar system without putting down tens of thousands of dollars at the beginning. 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.

What Terms You Should Know

While solar lease terms are dependent on which provider you engage with, there are certain terms that are frequently used across all lease agreements. Here is a list of the most common terms:

• Net metering: Net metering is a billing mechanism that credits solar energy system owners for the electricity they add to the grid. If a residential customer has a solar system on their roof, it may generate more electricity than the home uses during daylight hours. Customers are only billed for their "net" energy use. On average, only 20% to 40% of a solar energy system’s output ever goes into the grid, and this exported solar electricity serves nearby customers’ 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 are committing to make payments to the provider over a specific period. As mentioned before, residential leases typically have terms that last 20 to 25 years, while commercial solar leases are generally more flexible. They can range between7 and 20 years, depending on how the lease has been customized.

• Performance and maintenance: A key advantage of solar leasing is that the burdens of monitoring performance and providing appropriate maintenance falls on the service provider instead of the homeowner or business owner. For the duration of the lease, the leasing company will ensure the system operates correctly and will provide regular maintenance as necessary to allow the system to operate at peak performance. It must be mentioned that in general, solar panels do not require much ongoing maintenance outside of keeping them clean, though the transmission components that deliver electricity to the property may need regular attention to keep them functioning properly.

• Monitoring: In most cases, the solar leasing company will allow homeowners and business owners to monitor their system performance through free online, smartphone or tablet programs. This provides you the opportunity to see exactly what you are paying for and can alert you if maintenance is necessary.

• Buying the system: Most leases provide consumers the option of purchasing their system at various points during the agreement. Typically, the purchase price is laid out in detail in the agreement at the beginning. What this gives consumers is the ability to “try before you buy” to determine if solar panels are right for them. Once they purchase the system, however, performance and maintenance issues become their responsibility, so make sure you’re willing to take those on before ending your lease.

• 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, it may be necessary for the home buyer to pass a credit check, but generally if they are able obtain a mortgage, the credit check should present little problem.

• At the end of the term: Generally, there are three options when you come to the end of your solar leasing term. One, you can purchase the system outright. Two, you can end the lease and have your provider come remove the system from your home. Or third, if your provider allows for it, you can leave the system in place and sign a new leasing agreement, so the arrangement continues just as before.

Should you lease your solar system?

The strongest pitch for solar leasing is that the panels are “free” because you don’t have to pay for the installation of them upfront, choosing instead to pay for them over time through a set payment. While this arrangement made sense when interest rates were high and panels were expensive, that is less the case now. Interest rates, though rising, are still at historic lows, and the prices for solar modules themselves have never been lower.

If you don’t qualify for the federal solar income tax credit or don’t have the credit score necessary to get a solar loan, leasing may still make some sense for you. But if possible, installing your panels with a solar loan makes sense for most consumers. After all, a solar loan allows you to actually own the system. It makes it easier to include as part of future home sales, and once the system is paid off, electricity generation is essentially free.

Don’t make any decisions, however, without getting installation quotes from several local installers. This will provide you with the broadest number of options and help you decide what financing method will work best with your budget and your long-term housing plans. Getting multiple quotes will ensure you get the best price for your system, which will factor into the decision about what financing works best for you.

What You Need to Know:

• A solar lease provides homeowners with the ability to install a system without the upfront payments. Instead, homeowners and business owners pay a set monthly price that pays for the electricity generated, performance monitoring and maintenance. For some, solar leasing is a headache-free way to get solar panels on their property.

• In exchange for their monthly payment, homeowners receive all the power the solar panels produce, which will be credited on their utility bill through a process called net metering. Net metering is a billing mechanism that credits solar energy system owners for the electricity they add to the grid.

• One of the significant advantages of a steady lease payment is that it allows for easier budgeting for the homeowner each month and lowers their electricity bills (typically between 10% and 30%). In addition, the performance monitoring and maintenance responsibilities fall to the panel provider instead of the individual homeowners.

• Solar leases typically last 20 to 25 years, at the end of which time homeowners can either buy their 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 as prices for solar systems have dropped by nearly 70%. Other 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 giving homeowners “free” solar panels because there are no upfront costs, they fall short in terms lifetime payback compared to owning the system outright.

• For most consumers, leasing solar panels only makes sense if they don’t qualify for the federal solar tax credit or are found ineligible for a solar loan. Otherwise, finding another method for financing them, like a home-equity loan, makes much more economically.

• If your credit score allows you to procure a solar loan, it is often a more efficient, effective way to fund your solar panel system. It improves the long-term value of the system and keeps the federal tax credits and other solar incentives in the pockets of the homeowners instead of accruing to the leaseholder.

• Don’t make any decisions on financing your system without getting multiple quotes. It will ensure you receive the best price for your system and will allow you to make the best decision on your financing options.

To find out what your system could cost and whether a solar lease is the best method of financing, use Enphase’s system estimator.