Is It Better to Lease or Buy Solar Panels?Apr 03, 2022
By Michael Jones
A question I get all the time when I'm talking to people about going solar is whether they should buy their solar panels (either with cash or by financing the purchase with a solar loan) or lease them either from the installer or from a leasing company.
There is also a third option, called a Power Purchase Agreement (PPA), whereby the customer pays no upfront cost for installing the solar panels, but pays for the electricity the panels produce at a predetermined rate for a set number of years.
In this article, in addition to talking about the pros and cons of leasing or buying or signing a PPA, I'm going to give you a series of questions you need to ask yourself as a way of helping you to decide which is the best option.
There is no right or wrong way to go solar (despite what your "know-it-all" brother-in-law might say). A good solar advisor will ask these questions and, based on the answers, help you decide which is best for you.
But before we get into the questions, let's define a few of the key terms.
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Solar Leasing vs Power Purchase Agreement
These are terms that people often use interchangeably, which can cause confusion. While they are very similar, it's worth taking a moment to spell out the differences between the two.
With a solar lease, you are leasing the equipment itself for a fixed monthly fee, determined mostly by the size of the system. It's very similar to leasing a car.
With a PPA, the solar company covers the cost of installing the equipment and charges you each month only for the power the system produces, just like your current utility bill. Since solar panels generally produce more power in the summer months than in winter, this electric bill can vary each month.
More recently, some companies, most notably Sunrun, have started to adopt what they call a levelized PPA, whereby they take the annual production, divide it by twelve and bill you the same amount each month. This makes a PPA seem even more like a solar lease but the distinction still stands.
With a lease, you're leasing solar panels, with a PPA you're purchasing the electricity.
Purchasing vs Financing
If you buy your solar panels, the purchase can take one of two forms. You either pay cash for them or you finance the purchase with a solar loan.
Buying solar panels with cash is the cleanest, least complicated form of transaction. The problem is that most people don't have the tens of thousands of dollars it usually takes to purchase a solar energy system with cash.
This is particularly true if your house needs certain home upgrades before you can install solar panels. A new roof or an electrical upgrade can add many thousands of dollars to the cost of the project. And if you're paying cash, that's an upfront out-of-pocket cost that falls on you.
Solar loans provide the answer, offering favorable finance terms that are often tailored specifically for the peculiarities of the solar industry. And any required home upgrades can be rolled into that loan.
Interest rates typically range from 1.99% to 4.99%, with loan terms ranging from 10 years to 25 years. Your ability to borrow money is, of course, subject to credit approval, and your credit score will also determine what interest rate you'll have to pay.
Pros and Cons of Leasing vs Buying Solar Panels
Pros of PPAs or Leasing Solar Panels:
- One of the biggest financial benefits of a solar lease is that there are no upfront costs. This has made renewable energy available to millions of homeowners who otherwise would not be able to access solar power.
- Leases and PPAs include repairs and maintenance for the life of the agreement, while buying solar panels typically leaves that obligation with the owner.
- The solar company may help pay for any necessary home upgrades
Cons of PPAs or Leasing Solar Panels:
- You don't receive the tax credits or net metering credits, the owner of the system does, and that's the solar company. Those incentives should be factored into your lower monthly rate, though.
- You don't have as much control over your system size or panel placement. If the company determines that it's not worth it to place a solar panel on a certain section of roof that gets some sun, but not very much, that's pretty much their call to make.
- In the long run, you don't save as much money as you do when you buy solar panels
Pros of Buying Solar Panels:
- You will generally save more money when you buy solar panels vs leasing them.
- You get the federal tax incentives (26% at time of writing) because you're the owner of the system and, while money is money, it somehow feels better when you're getting something back from the government.
- You have more control over system-size and the placement of solar panels.
Cons of Buying Solar Panels:
- Substantial upfront cost that locks most people out of the benefits of renewable energy.
- Purchasing will either deplete your savings or require you to take out a loan.
- The owner is responsible for repairs and maintenance.
Important Questions to Ask
So, with definitions and pros and cons out of the the way, let's get to those key questions you need to ask before you determine whether it's better to buy or lease solar panels.
How Old Are You?
My very first solar customer was 86 years old. She wanted to go solar mainly to do her part for the environment but she did still want to save money. With the best will in the world, she was unlikely to see savings on a purchase that might take 8-10 years to turn cash-flow positive.
So if you're getting up there in years, a lease or PPA is probably the way to go. If you're younger, it depends on.....
How Long Do You Plan to Stay in the House?
The average American moves 11 times in their life. Depending on which stage of life you are at, that could mean you're either planning to move in the next few years or that you're settled in for the foreseeable future.
Only you know which is true. Do you have a young and growing family that can barely fit in the house you have? Are your kids heading off to college soon, leaving you as an empty-nester in the next few years?
If you're planning on selling your home within the next few years, then maybe it's better to lease solar panels or go with a PPA. Otherwise you'll be either taking on a lot of debt or laying out a lot of cash that you might need to put towards your next home purchase. All to purchase panels for someone else.
While it's likely you'll still see a return on investment because you'll get a better price when you sell your home, the hit to your cash reserves or to your debt-to-income ratio may affect your ability to finance your next home purchase.
What is Your Tax Situation?
Disclaimer: This is the point where the lawyers make me say that I am not your tax advisor. I am neither certified nor qualified to give you tax advice. Speak to your tax professional for advice on your own situation.
With that said, your tax situation will affect whether it's better to lease or buy your solar system. While it's true that you are able to reduce your federal tax liability through the Federal Investment Tax Credit, that is dependent on how much of a tax liability to actually have.
If you're retired, for example, and don't pay much in the way of taxes, those tax credits might not be of much use to you.
Again, it's important to speak with a tax professional about this stuff, rather than rely on an article by some guy on the internet.
How Many Sun Hours Do You Get?
Sun hours is the industry standard unit for measuring how much sun your property actually gets. It's a critical metric in determining whether buying or leasing solar panels is the best way to go.
That's because sun hours will determine the size of solar energy system you need, and system size naturally determines system cost.
All other factors being equal, a home that averages 1100 sun hours requires fewer panels to meet its electric needs than one that averages 700 sun hours. It could be the difference between a huge solar system costing $60,000 or a more more modestly-sized one costing $30,000.
That kind of price differential might put the cost of buying solar panels out of reach and make a solar lease or a PPA more attractive.
How Much Electricity Do You Use and Plan To Use?
Just like sun hours, your own electricity usage will have an impact on the size of system you need. If you live alone and only use 400 kWh a month, a relatively small system would be sufficient to meet you needs.
If your average utility bill is $400 a month, you're going to need a bigger system, which might make buying solar panels a more expensive, less attractive option.
The other factor I always ask my customers to consider is their likely future electricity usage. Maybe you plan to buy an electric vehicle in the next year or two, which is likely to increase your utility bills going forward. Maybe you're planning to move an elderly parent in, who needs a lot of power-hungry medical equipment. Or maybe you've always wanted a hot tub.
These kinds of scenarios will all impact your long-term power consumption, and may add a solar panel or two (or five or six) to your proposed system size. More panels mean higher upfront costs and may push you towards solar leasing options rather than buying solar panels.
Do You Need Home Upgrades?
Before anyone installs a solar panel system on their house, the installer is going to perform a site survey. This is an extensive review of your home to determine if it is suitable for solar. Sometimes these surveys identify problems that need to be fixed before a solar system can be installed.
A roof may need to be repaired or replaced, some rafters may need reinforcing, or an electrical upgrade may be required. In cases where an expensive home upgrade is required, a PPA may be a good way to get the solar installer to help pay for it.
That may increase your per kWh rate, and therefore your monthly payments, but as long as there is enough profit in the deal for them, they'll often help with the cost of the upgrade.
On the other hand, if you're buying solar panels, these upgrades will be an additional upfront cost that you will either have to pay out-of-pocket or, worse yet, roll them onto a solar loan, in which case you'll still be paying for them out-of-pocket, but with interest.
What Other Big Expenses Do You Have Coming Up?
Borrowing money or paying out a large sum upfront are big financial moves. They can affect credit scores, debt-to-income ratios and other factors that may impact your ability to borrow more money in the future.
Maybe you have teenage kids for whom you're likely to have to take out a college loan. Maybe you're going to need a new car in the next year or two. Or maybe installing a solar energy system is just the first step in a full home electrification project that is going to require the financing of several other home upgrades in the coming years.
It sometimes makes sense to "keep your powder dry" for future expenses and not take on solar loans when you don't need to.
While a solar company will probably require a credit score of 650 or above in order to qualify you for a PPA, neither the credit check nor the signing of the agreement will affect your credit score or debt-to-income ratios.
There's no doubting the benefits of solar power, but the truth is, there is no right or wrong way to install solar panels, only what's right and wrong for you. Consider upfront costs vs monthly payments, the long term financial benefits vs the peace of mind of knowing that repairs and maintenance are taken care of.
Ask yourself these types questions when you sit down with a solar professional and you'll be well on your way to determining whether you should lease or buy your solar panels.
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