A solar lease is a financial agreement where you pay a monthly fee to use solar panels installed on your property, but you don’t own them directly. The solar company providing the lease assumes all upfront costs, and also ongoing costs like maintenance and repairs. In exchange, you agree to lease the photovoltaic (PV) system for a specified term, typically 10-25 years.
Leasing solar panels is an option for homeowners who want to avoid a large upfront payment. Instead, you pay a fixed monthly fee that is calculated to be lower than your electric bill savings. This also means you achieve net savings from the first month of a solar lease.
You can also install a solar PV system at zero upfront cost by taking a low-interest loan. However, most of these loans are only available for homeowners with a high credit score. Solar leases normally have higher monthly payments than solar loans, but they are less demanding with respect to your credit record.
How Does a Solar Lease Work?
In a solar lease, you sign a contract that charges you fixed monthly fees to use a solar energy system. You can use all the electricity generated by the solar panels, which is subtracted from your utility bills. The exact contract terms vary depending on the solar lease provider, but most of them have the following conditions:
- Solar leases have a financial penalty for early termination. However, many leases give you the option of buying the solar panels as a way to end the contract. If you move to another home, a solar lease can generally be transferred to the new owner.
- Most solar leases have a price escalator to compensate for inflation. Your savings increase over time as local electric tariffs become higher, but your monthly lease payments are also raised gradually.
The solar lease provider is responsible for all the costs associated with the photovoltaic system: solar equipment, parts, installation labor, financing, maintenance and repairs. If your solar system malfunctions during the term of the lease, the provider is responsible for fixing the issue. Lease providers will generally use a monitoring system to make sure your solar array is operating correctly at all times.
Before signing a solar lease, you should take the time to read the contract carefully. The lease provider should be fully responsible for maintenance and repairs during the entire contract term. Otherwise, there is no point in paying a monthly fee.
You are responsible for using the solar panels properly, just like when renting a car. Solar lease providers take responsibility for any issues that occur when the photovoltaic system is being used normally. However, the client is held responsible for any damage caused by incorrect use.
Keep in mind that solar incentives like the 30% federal tax credit are offered to the legal owner of a photovoltaic system. When you sign a solar lease, the system is owned by the provider and they get all the incentives.
What Is the Difference Between a Solar Lease and a Solar PPA?
A solar power purchase agreement (PPA) is very similar to a lease, since the provider assumes installation and maintenance costs while you agree to monthly payments. The main difference is how these payments are calculated:
- A solar lease has a fixed monthly payment, which increases by a fixed percentage each year (price escalator).
- A solar PPA has a kilowatt-hour price, and your monthly payment is calculated based on the electricity output of the solar panels.
In other words, a solar lease charges you for using the panels, while a solar PPA charges you for the electricity produced. The electricity price in a solar PPA is set lower than the electric tariff charged by your power company, which means you get savings from the first month.
Most solar PPA contracts also have a price escalator, which means the kilowatt-hour price increases over time. However, you will save on power bills as long as the PPA price remains below local electric tariffs.
A solar lease has predictable monthly payments, since you know the initial fee and the price escalator. On the other hand, solar PPA payments vary depending on the season and weather conditions. You can expect higher payments in summer, since solar panels generate more kilowatt-hours, and lower payments in winter when they are less productive.
What Is the Difference Between a Solar Lease and a Solar Loan?
Solar leases and loans both give you the option of installing a photovoltaic system for zero upfront cost. Part of your power bill savings are used to cover monthly payments, and the difference stays in your pocket as savings. However, when taking a loan you are actually purchasing the solar panels. Even if you owe money to a bank, they don’t own your panels.
- Since you are the legal owner of the solar energy system, you are entitled to the federal tax credit and any other incentives available locally.
- You can also use incentives to help pay off the loan. For example, if your solar installation has a cost of $15,000, the 30% tax credit is equivalent to $4,500.
Being the owner of your solar panels is also an advantage if you decide to sell your home in the future. The photovoltaic system is part of your property, and not bound to a lease contract. You don’t have to worry about finding a buyer who is willing to assume the lease payments.
Financing a solar panel system with a loan only makes sense if you can get low interest rates. This ensures that the monthly power bill savings will be higher than the loan payment. High-interest loans are not viable for financing solar panels, since interest payments can consume your payments completely.
Pros and Cons of a Solar Lease
Like in any purchase decision, a solar lease has advantages and disadvantages.
|Pros of a Solar Lease||Cons of a Solar Lease|
|1) You can install solar panels at zero upfront cost. The initial investment is replaced with fixed monthly payments.|
2) The solar lease provider is responsible for maintenance and repairs.
3) You can qualify for a solar lease without having a high credit score.
4) Solar lease payments are calculated to be lower than your monthly electricity savings. In other words, the payments come from your savings and not from your pocket.
|1) Lease payments consume a large portion of your power bill savings. You can save more over time with a cash purchase or solar loan.|
2) You don’t own the solar panels directly, which means you miss out on incentives such as rebates and tax credits.
3) Most solar leases have a hefty financial penalty for early termination.
4) Selling your home can be more difficult, since the new owner must be willing to take over the lease.
You will achieve the highest savings in the long run if you pay for your solar panels in cash, but this represents a major expense. According to the March 2023 Solar Market Insight Report, US homeowners can expect to pay $3.30 per watt of solar capacity. This means a 5-kW rooftop solar system can cost you around $16,500 before incentives. The net price drops to $11,550 after subtracting the 30% federal tax credit, but you must wait until the next tax declaration to claim the deduction.
If you have a high credit score, a solar loan will normally result in a lower monthly payment than a lease, which means your net savings are higher. You also own the solar panels outright, and you can claim solar tax benefits and other incentives.
With a cash purchase or a solar loan, the system provider is not responsible for ongoing maintenance. However, the best solar panels now come with a product warranty of up to 25 years, and solar installation companies offer their own workmanship warranties. You are responsible for keeping the solar panels clean, but malfunctions are covered by the manufacturer and the installation company.
Comparing the Solar Purchasing Options
If you’re a homeowner who is considering solar panels, there are four main purchasing options:
- Cash purchase
- Solar loan
- Solar lease
- Solar PPA
Considering the average solar installation price in the Solar Market Insight Report ($3.30/watt), you can expect to pay $19,800 for a 6-kW home solar system. Subtract the 30% federal tax credit, and your net cost is reduced to $13,860.
Here we will compare how the numbers pencil out in each of the four solar purchasing options. Keep in mind this is a very simple example. You can contact a professional solar installer to get an accurate quote and savings estimate.
Under favorable sunlight conditions, a 6-kW solar panel array can generate over 9,000 kWh per year. At an electricity price of 20 cents/kWh, this is equivalent to $1,800 in potential savings. If you pay for the solar panels in cash ($13,860), the payback period is 7.7 years. While this may seem like a long time, consider that the best solar panels now come with a 25-year product warranty (much longer than the payback period).
If you can get a solar loan with an interest rate of 4% and a repayment period of 15 years, the upfront cost of $13,860 is converted into 180 monthly payments of $103. You pay $1,236 per year, and the solar panels are saving you $1,800. In this case your solar panels yield $564 in net savings from year one, which means the payback period is essentially reduced to zero.
Solar loans become less viable if the interest rate is high. For example, the monthly payment in this example increases to $194 at 15% interest rate, and annual payments add up to $2,328. Annual loan payments exceed the power bill savings of $1,800, and loan financing is no longer viable under these conditions.
Generally, solar loans are an attractive option for homeowners with a high credit score and access to low interest rates.
Solar leases have higher monthly payments than low-interest solar loans. For example, you might be charged $125/month for using a 6-kW solar system, which means your annual lease payments add up to $1,500. However, your net savings are $300/year and the lease provider is responsible for keeping your solar panels in good operating condition.
Signing a solar lease is generally a better option than a high-interest solar loan, but a low-interest loan normally yields higher savings than a solar lease.
Solar Power Purchase Agreement (PPA)
You might also find a solar PPA that charges you 16 cents/kWh, which is 20% less than the local tariff of 20 cents/kWh. The solar power system generates 9,000 kWh/year, and you pay $1,440. However, you save $1,800 in power bills and your net savings are $360.
In a solar PPA, your payments vary each month depending on electricity production. In this example, you might pay $160 on a sunny month where the solar panels generate 1,000 kWh, and $80 on a winter month where they generate 500 kWh.
Generally, solar leases and PPAs will yield similar savings per year. The difference is that a solar lease charges you equal monthly payments, while a solar PPA charges variable payments based on electricity generation.
“Free” Solar Panels: Are They Really Free?
You may have seen online ads offering “free” solar panels. This is a marketing strategy used by some companies, and they are actually referring to solar leases and PPAs. While it is true that your upfront cost is zero, the concept of free solar panels is misleading, since you must sign a contract that involves monthly payments:
- You pay a fixed fee in a solar lease.
- You are charged for monthly electricity production in a solar PPA.
“Free” solar panels are not actually a scam, but the companies who make this offering are not being completely transparent. You will find many solar installers who are honest with their product offering and payment options.
Conclusion: Are Solar Leases Worth It?
When leasing solar panels, you avoid the upfront cost and pay a fixed monthly fee instead. The lease payment consumes a large fraction of your savings, but your out-of-pocket cost becomes zero and you get positive cash flow from the first month.
If you purchase your solar panel system in cash, you achieve the highest possible savings in the long run. The downside is having to pay over $10,000 at once, and waiting several years before breaking even.
You can also install solar panels at zero upfront cost by taking a loan. If you can qualify for a low interest rate, a solar loan results in lower payments than a solar lease. However, leasing solar panels becomes a better option when you are only offered high interest rates.