Considering the many benefits you can get from installing solar panels on your home, it’s no wonder more people are choosing to “go green.” The only problem is the cost, which scares many people away. How much does it cost to lease a solar power system? This guide takes a deep dive into solar installation costs for leased solar systems.
There are, however, several ways to finance your solar installation. Leasing is one of them. By leasing a solar power system, you can reap the benefits that come with it without having to pay a lot of money upfront to get it.
According to Doug Snower, president of an alternative energy company, Wind Free, the discussion of buying versus leasing in solar technology is not much different from the same discussion we have around leasing cars.
Doug notes, “If you choose to lease an electric or hybrid car, tax credits and gains in energy efficiency offset monthly lease costs to make the leasing option more affordable. At the end of the lease, you’d also have the option to purchase your car from the dealer. This model is very similar to what’s in place for solar system leasing.”
So, let’s take a deeper look. Why do some people choose to lease a solar power system instead of purchasing it outright? Here are five reasons, as well as how much it costs to do so.
1) Cash flow and affordability
A lease could make sense for you if you’re the type of person who doesn’t like to sink all of your cash into something that might not appreciate right away. The average cost of leasing solar panels runs anywhere from $50-$250 per month.
With little to no down payment for leasing, this could be a good option for a cash-strapped individual or business.”
With little to no down payment for leasing, this could be a good option for a cash-strapped individual or business.
Considering that solar panel installations start in the tens of thousands of dollars, leasing could be more accessible to the general population. With a lease arrangement, you’ll make lower monthly payments while your freed up cash can work for you in other investments like stocks, bonds, or real estate.
Leasing is especially attractive to people who see an urgency in using environmentally-friendly energy, but aren’t able to afford it. With a lease, you can begin reaping the benefits of a solar system without having to come up with a large down payment to make it happen.
2) Tax credits
If you lease a solar panel system, the manufacturer can extend a discounted price to you based on the tax credit they receive as a lessor.
Snower explains, “Much like leasing an environmentally-friendly car; you’ll be able to reap the benefits of manufacturer’s tax credit based on your solar panel system lease. Many times, they will extend that tax credit benefit into a lower monthly lease price for the consumer.”
Note that you’re also eligible for tax credits if you decide to purchase a solar panel system outright. However, if your income isn’t large enough to take advantage of the tax credits, your net cost of ownership might be higher.
Here are the possible tax credits, rebates, and programs available to those who own their solar system. This will help your analysis:
- The Federal Investment Tax Credit is available to all homeowners no matter where they live in the U.S., and it will offset the cost of purchase and installation by 30%. This applies to solar systems installed before 2020.
- State, local, and utility rebates and taxes credits. Amounts of incentives will vary by region, but these additional perks can add to the benefit of owning a solar system.
- Net metering means that you capitalize on the energy your solar system produces to even out your bill. For example, when your system produces more energy than you can use in the long days of summer, you can build that up against the short cloudy days of winter. Instead of getting energy from the grid in lower sunlight months, you can pull from your “energy reserves” you built during sunnier times.
- Solar Renewable Energy Certificates (SRECs) are energy “credits” homeowners get from selling their solar energy to utility companies.
If you own your solar power system, you’re responsible for repairs and management on your own. If you lease, though, many solar power leasing companies will include maintenance, upgrades, and servicing in the monthly leasing cost.
The leasing company will want to protect their investment, so they will provide services to keep the leased solar equipment in working order.
If you lease your solar panel equipment, you don’t own it. But that can change if you want it to. Many lease terms offer an option to purchase once the lease ends. The only caveat is, if you move or try to sell your home before the lease term is over, you’ll typically have to make arrangements for the new owner to assume your lease.
Though we’re focusing on the benefits of leasing your solar power system, that’s not to say there are no benefits to owning it. There are several. Owning your solar power system will not only raise the value of your property, but it also has a great return on investment: you’ll save on energy costs and potentially monetize your solar energy in the SREC market.
5) Energy costs
Depending on the type of lease agreement you have, you could be eligible to lock in energy rates that stay under energy inflation rates for many years. Additionally, many states offer local and federal tax incentives to solar panel lessors, which are passed on to lessees. Conversely, if you own your system, you can’t benefit from locked-in rates a lessee would negotiate as part of their lease agreement.
What factors affect solar installation costs for my lease?
The truth is, it depends on your situation. Leasing costs are determined by factors such as your home’s location, home size, and usage rates.
Leasing usually makes the most sense where electricity costs are higher, and the benefits of tax credits, rebates, and other incentives are plentiful. While it helps if you live in a sunnier part of the country (because your panels would absorb more sunlight and produce more energy), it’s considered only one part of the leasing equation.
For example, a homeowner in Oklahoma (a sunnier state) has the potential to capture more sunlight to offset energy costs. But residents in colder, less sunny states like New York, New Jersey, and Massachusetts would fare better with solar installations due to the tax incentives available.
If you’d like to know where you state stands on solar energy friendliness, here is a report that grades states on factors like incentive, the cost of electricity, internal rate of return, etc.
Another factor to consider is the amount of your electric bill. If you’ve got a lower bill– say less than $50 each month– you’ll be hard pressed to find a leasing option that would be less than this amount. You won’t save money, and your lease rates are considered expensive compared to traditional energy sources.
However, if your electric bill tends to be on the higher side– say upwards of $100 or $200– you’ll find plenty of lease options that are within this price range.
Finally, you’ll want to consider the structure of your home itself. Can you install solar panels on your roof? Is there a lot of shade that could cover your panels and prevent the effective absorption of sunlight? Other factors include the direction of your roof, your roof’s age, and if it could support the weight of solar panels.
This is one of the most important factors when committing to a solar lease. It will be written into your agreement and directly affect your monthly payment. The payment escalator clause should help you save money on the rising energy costs, but this may not always be the case.
For example, if your payment escalator is 3% per year, but the inflation rate for energy costs in your state hovers around 2.5% per year, then you are paying more for energy costs over time with a lease.
To give you an idea of energy costs for your state, read this U.S. Energy Information Administration report on the energy costs for your state going back to 1996.
Once you understand the anticipated rate of inflation for your state’s energy costs, make sure your payment escalator doesn’t exceed that rate. This way, you won’t overpay for energy costs on your solar lease.
What are the different types of solar leases?
There are three types of solar leases:
- Finance (or capital) lease
- Operating lease
- Solar power purchase agreements (PPA)
Capital leases are typically for commercial or business use. You make monthly payments to a financing institution (often a bank) and eventually have the option to buy the solar panels that you’re leasing. Common lease terms last for five to 15 years. Under this arrangement, lessees can get some benefits from utility rebates and tax credits.
For example, if your business does end up paying corporate income tax, an investment in a solar installation would earn 30% in Federal tax credits (allows you to deduct 30% of the cost of installing a solar energy system), along with MACRS depreciation.
More features of a capital lease include:
- Takes into account company credit rating, which also affects the interest rate (usually fixed)
- The interest portion of the lease is tax deductible
- The loan is typically secured by the solar system assets
- The solar system assets appear on a business or person’s balance sheet as an asset
- Interest rates can be higher than other types of collateralized loans
An operating lease means the lessor truly owns the solar system while the lessee simply makes monthly payments to use the solar panels. The lessor receives the benefits of tax credits, depreciation, and other incentives.
The benefit to an operating lease is that these arrangements don’t require any down payment. This could also be beneficial to individuals or entities that don’t have much of a tax liability.”
The benefit to an operating lease is that these arrangements don’t require any down payment. This could also be beneficial to individuals or entities that don’t have much of a tax liability.
If you can’t tax advantage of the Federal Investment Tax Credit due to limited income, then leasing would be ideal. The only thing that you’ll have to be mindful of is how much your energy rates could increase with the payment escalator clause.
As mentioned before you could end up paying more if your annual increases, per leasing terms, outpace actual energy inflation costs.
Solar Power Purchase Agreements (PPA)
A PPA is very similar to an operating lease, with one main difference.
Instead of paying a rental rate for the solar system and power generated from it, you’re just paying for the power generated by the solar system. You’ll be paying per kilowatt hour in the range of 10 to 13 cents per hour.
With this arrangement, you’ll still have panels installed at your property. You will just be agreeing to pay a third party for the energy produced by those panels.
Though your rates are slightly less than retail rates, your rates will include the administrative costs the servicer incurs to provision your PPA agreement. Your PPA servicer will be coordinating the installation, financing, and even maintenance associated with your PPA contract.
So, while they’re reaping the benefits of all financial incentives associated with solar power use, they’re not passing down the lowest energy rates to you without some markup to cover their overhead.
So, how does leasing a solar power system compare to buying one?
Again, this comparison is difficult to make because of all the factors that go into both leasing prices and outright purchase prices. Your particular financial and housing situation will come into play in this analysis, as well.
But for comparison’s sake, let’s walk through the calculations so we can get closer to an answer.
If we take an average size home in the state of Illinois whose power usage is equal to 600-kilowatt hours (kWh) per month; it would require a 5-kilowatt system. An outright purchase would be about $15,000 and would cut a homeowner’s electric bill by as much as 50%.
With a 30% federal tax credit and a combination of other rebates and incentive through the state of Illinois, it could take about five years for the system to pay for itself.
With a lease, your monthly payment would be about $100-$150 for 10 years. You’ll spend about $12,000-$18,000 over the course of 10 years. At the end of the term, you’ll end up owning the panels (if you choose to buy) By leasing, your overall cost could be more than an outright purchase, but you won’t have to put up a lot of cash up front.
Overall, it’s ideal to purchase a system (or at least be an owner even if it’s through financing) because of the incentives available to owners. However, leasing is still a good option if you need a no-money-down approach and slightly lower utility rates.
For an analysis that considers all the factors about your situation, consider using a solar calculator to estimate costs and savings associated with the installation of a solar power system in your home.
The bottom line
The fact of the matter is that everyone’s situation is different. The best solar solution for your neighbor might not be the best solution for you. If leasing isn’t the right move for you, getting a solar loan might be better.
If you prefer the benefits of owning your solar power system, but you don’t have the cash to afford it up front, a solar loan could be just what you’re looking for.
Use SuperMoney’s loan offer engine to discover the best loan options for your situation. Then, head over to our reviews page to compare lenders. Once you decide which financing path you want to take, you’ll finally be one step closer to finally going solar.