Pros And Cons Of Leasing Solar Panels
6 - Minute Read
Sep 15, 2022
There’s more than one way to afford solar energy, and it doesn't always involve paying for a solar panel system upfront. Did you know that you can also lease solar panels?
Leasing may offer a viable option under the right circumstances. Let's explore how it might work in your situation and the pros and cons of leasing solar panels.
A Quick Look At A Home Solar System Lease
The cost of solar panels depends on multiple factors, but can range from $15,000 to $40,000 or more, which is why some homeowners look into a solar lease. At its very basic level, a home solar system lease means that you:
- Pay a monthly fee to use the panels and the electricity they produce.
- Don’t own the panels on your roof.
- Lease periods usually have a 20-year duration, which is typically less than the expected lifespan of solar panels.
- You often have the option to buy the solar system at a discounted rate at the end of the lease.
You can take advantage of the solar energy the panels produce during the lease. A solar lease essentially works by exchanging the electric bill from your utility company for a lowered bill from a solar leasing company.
A Quick Look At Buying Solar Panels
When you buy solar panels, you own the panels and can tap into financing options, some specific to renewable energy. You can pay for solar panels in several ways. We’ll discuss purchasing solar panels with cash, using a home equity loan or through a solar loan:
- Paying cash: Paying cash for solar panels offers the cheapest option for purchase because you don’t have to pay back any interest. It’s also easier to calculate the full solar panel costs based on the initial purchase price and your estimated monthly savings because you don’t have to work monthly payments into your calculation.
- Home equity loans or home equity lines of credit: Home equity loans or home equity lines of credit (HELOCs) are another option to help pay for solar panels. A home equity loan is a type of second mortgage that allows you to borrow against the equity in your home. You can typically borrow between 75% and 90% of the value of your home. A home equity line of credit, on the other hand, is a type of second mortgage that allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Your home serves as collateral for these types of loans, which means you could lose your home if you undergo foreclosure.
- Solar loan: A solar loan is an unsecured or secured loan that you must pay back with interest over the loan term. “Unsecured” means that the loan is not backed by collateral, whereas “secured” means uses your loan is backed by an asset, such as the solar panels themselves. You can get a solar loan through a solar company or through a third-party lender. A solar loan allows you to space out your payments but you’ll pay more over time due to the interest charges.
Leasing Vs. Buying Solar Panels: Pros And Cons
Let’s walk through the pros and cons of leasing vs. buying solar panels.
Pros Of A Solar Lease
Take a look at the pros of a solar lease first:
- There is a lower initial expense. You may be able to get solar panels put on your home for little to no money down.
- You don't need to separately shop for an installer and financing.
- A solar lease can insulate you from rising energy costs because you’ll pay directly for the solar energy you produce.
- You can use technological services like smartphone apps to track performance and usage, and online portals can help you keep tabs on billing.
- Plenty of information is available online to determine if your potential vendor is reputable.
- It can be a great option if your current house isn’t your “forever home”, but you still want to produce solar energy. This way, you won't make the full purchase investment and will only pay on a lease up until you move away from the home or until you break the lease with the solar company.
- Your lease company will typically take care of maintenance and monitoring of equipment.
Cons Of Leasing Solar Panels
It's worth considering the cons of leasing solar panels before you jump into leasing:
- Since you don’t own the panels, you can’t take advantage of federal or state incentives such as tax credits or rebates you may be eligible for.
- Solar panels don’t increase your home’s value because they are leased, not owned.
- Breaking the lease can be challenging if you decide to sell your home. Some buyers may be reluctant to take over a lease and you might have trouble buying out the lease early.
- Compared to purchasing solar panels, leasing solar panels usually costs more in the long run.
- You don’t have any choice in the quality of the components in the system – the leasing company chooses the brands you'll receive.
- Leases often initiate very long-term contracts, which means you'll make a monthly payment to a provider for 15 - 25 years.
- Many leases contain an escalator clause. This means that payments will increase and cut into future savings.
Overview Of Home Solar Incentives
For those that own solar panels, there are certain installation incentives like tax credits that can lower the cost if you are eligible. With a solar lease, the leasing company can take advantage of the incentives. In other words, you don't benefit from the tax credits – the solar loan company does. You can factor them into your ultimate costs at your own discretion.
The Federal Solar Tax Credit can reduce the upfront costs of solar systems for homeowners planning to buy. A tax credit reduces the amount of taxes you pay when you file.
The federal solar tax credit offers qualified applicants a 30% tax credit for systems installed by December 31, 2032, 26% for systems installed in 2033 and 22% for systems installed in 2034.
There are a few requirements to qualify for the Federal Solar Tax Credit. The solar system must be located at your primary or secondary residence. You must also own the solar system – you cannot lease or be in another type of arrangement to get electricity through a solar system you do not own. The system must also be new or being used for the first time. Consult a tax professional to discuss your eligibility.
Tax credit incentives cover more than just the solar panels, according to Energy.gov. Tax credit incentives can also cover your contractor installation costs, costs for inverters, wiring and/or the mounting that the panels sit on. You can also consider energy storage and sales tax as eligible expenses.
When you buy solar panels, you may be able to take advantage of state incentives such as rebates, tax credits, property tax relief, solar renewable energy certificates (SRECs) and performance-based incentives (PBIs).
- Rebates: A rebate is a partial refund to you after you buy your solar panels. In a leasing situation, a solar vendor files for a rebate with the utility company, local government or other organization that runs the rebate program. Some states exempt you from having to pay property taxes (at least temporarily) if you buy a solar system.
- PBIs: Some states offer performance-based incentives (PBIs), which are incentives that are paid out based on the actual energy production of the solar system. These are usually paid on a kilowatt-hour (kWh) basis over a period of time. PBIs offer a flat-rate payout for every kWh of solar energy generated based on an agreement with the utility company that you use.
- SRECs: Some states also give SRECs, which are PBIs that allow you to earn additional income from solar electricity generation.
Solar PPA Vs. Lease
A purchase power agreement (PPA) is a financial arrangement (not the same as a lease) in which a third-party developer owns, operates and maintains the solar system. In the case of a PPA, you, as the homeowner, would agree to put the solar system on your property and purchase the electric output from the solar services provider.
Instead of paying a monthly fee as you would with a lease, you pay for the solar power generated from the solar panels. In the case of PPAs, bigger systems will cost more. In addition, monthly costs for PPAs may fluctuate, while solar leases have more fixed prices.
The Bottom Line: Is It Better To Lease Or Buy Solar Panels?
Is it better to lease or buy solar panels? Ultimately, it depends on your finances.
If you do not want to come up with the initial amount of money you need to have in order to purchase solar panels, you may want to consider a lease. However, it's worth noting that it's very possible that you will pay more for a lease in the long run compared to paying for a solar system outright. You can pay for solar panels in several ways, including using cash, using a home equity loan or through a solar loan.
Before deciding to lease vs. buy solar panels, be sure to read up on whether your house is a good candidate to produce solar energy. And, consider the incentives you could miss out on when entering a solar lease.