What are the pros and cons of Buying Solar vs Leasing Solar vs PPA agreements?
What does the term Solar Lease actually mean?
Very few American's actually purchase their solar systems with a big wad of cash. As is the case in the auto industry in America most residential solar consumers who have purchased solar solar for their home have either entered into a solar agreement where payments are spread over the life of the system or, if they have got a cash price from an installer, they have used some other finance to pay this upfront price.
In the industry different people are often passionate that one way or the other is better but in actual fact I don't think that either method of procuring a solar system is always the best. In my view the answer as to whether it is better to lease or buy your solar energy system depends on the financial situation you are in, your intentions in relation to your home, the cost at which you can obtain finance, the quality of your credit score and a whole range of factors unique to the individual.
This is not a general discussion on the pros and cons of purchasing a solar energy system the advantages and disadvantages referred to below refer only to one method of financing a purchase over another.
I find that people use the term solar lease to describe three different types of agreement.
- First is a finance lease (sometimes known as a capital lease);
- The second is an operating lease; and
- The third type of transaction is a Solar PPA agreement which is not actually a lease at all but an agreement to purchase power generated by the solar panels that someone else installs on your home.
A vast majority of general leases are operating leases. An operating lease is treated like renting - payments are considered operational expenses and the asset being leased stays off the balance sheet. In contrast, a capital lease is more like a loan; the asset is treated as being owned by the lessee so it stays on the balance sheet. The accounting treatment for capital and operating leases is different.
Most solar leases are Capital or finance leases because the lease is for more than 75% of the expected life of the solar panels and contains a discounted buy out provision at the end of the lease term to allow the householder to buy the solar equipment.
Not all states have been able to have solar leasing because for solar leasing to work a state had to legislate so that any state, county or utility based solar incentives that were normally available to a purchaser (owner) of a solar system could also be enjoyed by a lessor of a solar system.
Most of the largest solar states in the US such as California, Arizona, New York, Massachusetts, New Jersey and Connecticut are the states that have made the legislative changes needed to allow lessor's of solar panels to enjoy the same incentives as owners of purchased solar systems.
Advantages of a Solar Lease
- The first and most obvious advantage of a solar lease is that you don't have to come up with a large sum of cash to pay the large upfront capital cost to buy a system.
Often it is possible to get a zero down solar lease deal where your monthly repayments are lower than the amount you save on your utility bill, so you profit each month without ever making an investment. I don't think people realize how rare it is to be able to make a profit, even a small one, without laying out any investment up front.
- A second potential advantage of a lease is that sometimes the lessor may be responsible for maintenance of the panels. This means that as the homeowner you do not have to worry about equipment failure.
Dissdvantages of a Solar Lease
- The first disadvantage of a solar lease is that usually they are very long term contracts. This means you are going to be tied to paying a monthly payment to the owner of the solar panels, ( the lessor ) for 15-25 years.
- A solar lease can also create difficulties if you go to sell your property during this time. Usually a lessor will require that if you sell your house during the lease term that the purchaser of the house take over the assignment of the solar lease. However, an issue could arrive if by that time there are cheaper and better solar products available and a potential purchaser does not wish to take over the lease, In this case you may be required to pay a break fee to the leasing company.
What is a solar PPA & how does it work?
With a solar PPA, you do not own the solar system on your home. You buy electricity from a company which owns the panels sitting on your roof and usually solar PPA company can be a so-called third-party financing firm such as SunRun or Sungevity, which do not technically install the solar system but contract with local solar installation companies to put PV on your roof, or it might a company that handles both financing and installation such as SolarCity. While solar leasing terms vary considerably, leases typically allow you to go solar with little to no money down and are based on 15 to 20 year contracts which usually allow you to buy the system at the end of the lease.
Advantages of a Solar PPA agreement
- The advantages of a Solar PPA agreement is very similar to the advantages of a solar lease agreement. Namely, you do not face an upfront cost to go solar.
However, there is one further advantage of a PPA over a lease and this is that there is no fixed monthly payment with a PPA agreement, As the name suggests a PPA agreement is an agreement you make to buy power produced by solar panels placed on your roof and owned the Solar PPA provider at a specific price. So if, for any reason these panels are not working for a period, or are producing less power than quoted then your payments for the solar system fall accordingly. With a pure lease the monthly amount is due regardless of actual electricity production from the panels.
Disadvantages of a Solar PPA agreement
- The same disadvantages apply with regards to Solar PPA agreements as apply with regard to Solar Leases. Namely that they are very long term contracts and they need to be assigned to a new owner of your house if you decide to move house.
- However, there are some specific further disadvantages of a Solar PPA agreement. Usually they have an uplift in pricing each year so that the electricity you purchase from the solar panels on your roof actually goes up in price over time. However, usually this escalation is at a lower percentage than the average annual increase in power prices charged by the utility.
Advantages of buying Solar Energy Solar System outright
- When we talk about buying a solar panels for your home we are not necessarily talking about you forking out a large lump of cash upfront. Some people do this but most people that buy their solar panels still use some form of finance to do this. The most common is a home equity line of credit. Because this type of facility is secured over your home, along with the rest of your home loan, the finance rate on this is usually lower than any other form of finance.
What we mean when we say "buy your solar system outright" is a transaction where you become the owner of the panels.
The advantage of this is that you have total freedom over what you do with the panels and are not tied to monthly payments for a long period of time.
- Generally buying is a better economic bet because home backed finance is the cheapest type of finance. Solar leasing companies have to make money, and, even though you’re likely to save by paying leasing companies for your electricity as opposed to forking money over to your utility, leasing companies will still be making money off of you. A leasing company will pocket all solar incentives you’d otherwise get if you bought the system. If you buy, you pocket all of the incentives and all of the long-term electricity savings yourself.
- If a solar system is facing multiple angles, meaning some panels are facing south, some east, and some west, then micro-inverters are the way to go. Or, if you have shading issues from trees or a large chimney, again micro-inverters would be best. In these situations, the solar panels will be producing different amounts of electricity at different times of the day, but micro-inverters will ensure you harvest all of the energy, while with a standard inverter you will lose some of this production. With solar panels all facing one direction on your system, and you have marginal shading issues, then your best option is a standard inverter. You'll get about the same production, without paying the higher cost.
- Buying offers you more flexibility and freedom.
You have more freedom in terms of the size system you put on your home, the brand of solar panels you choose and the type of inverter you choose. Solar PPA companies tend to control all of these choices for you and some leasing companies may do so as well.
Another way in which you gain significantly more flexibility by buying a system is there are a lot more small solar companies in the market that can provide you more personalized service.
- Another advantage of buying a solar system is that you do not have to deal with the solar transfer issue on the sale of your house.
When you buy solar outright it adds value to your home but here is a lot of debate about the extent to which solar panels increase the value of your house. Some say they increase the value of your house by as much as they cost and others will argue they actually add little value to a home. In truth they would probably add value in some buyers minds but less value in others.
Disadvantages of buying Solar Energy Solar System outright
- Obviously, the first disadvantage is that you have to pay for them. This payment can either come from savings or a loan of some type.
- The second disadvantage is that you are responsible for the maintenance of the system.
Obviously the solar panels< and inverters will have a warranty and you should have a workmanship warranty from the solar company that installs your panels but often solar companies will be reluctant to help you after a system is installed. Sometimes solar panel and inverter manufacturers will require you to test equipment if you believe it is faulty and sometimes they will want you to post it to them for them to test before they determine if the faulty is a warrantable claim. All of these things usually get sorted out but it is a bit of a drag and solar installation companies are sometimes slow to help because there is no revenue to be made from helping you once your solar is installed (HINT Use good brands of solar panels and inverters and these issues will be quite rare and fairly painless to sort out if they happen.
SolarReviews last word on the lease vs buy solar debate
If I had the income that meant I can use the Federal Tax Credit I would buy.
There are many more small installers with low overheads that sell cash systems and these small installers usually can offer more personalized service than the large solar installers.
However, if you don't have savings, if you cant use the 30% federal solar tax credit yourself (you need taxable income before a tax credit is valuable to you) or if you can't get a home equity line of credit easily, then some of the lease and PPA products offered by the larger solar installers are still really good. Many are zero down, with monthly payments less than the monthly savings.
How can you go wrong with this, especially when the monthly savings will just increase over time as power prices rise. Just be patient if you do go with one of the large solar installers because these companies are growing very fast and most of them have had customer service issues (which is often why their reviews are amongst the worst on this site. With these companies if you rely on any statement they make ensure that you have it in writing. The salespeople often make promises that the installation people cant meet.