Congratulations! You’re thinking about investing in solar panels – one of the best decisions you can make to cut your carbon footprint, combat climate change and help make a more sustainable future for everyone. But what’s the best way to pay for your solar installation?
There are so many options that it can be confusing, so let’s take a look at what’s available to help you make an informed choice.
Solar panel financing options for homeowners
The first decision to make is whether to choose direct ownership or to rent your solar installation.
There are benefits and disadvantages to each; your own personal circumstances will determine which one is right for you.
If you’re keen to own the system yourself, there are many ways to pay for your solar panel installation.
#1 Paying Outright
The simplest, and often cheapest, choice is to dip into your savings and pay outright for your solar panel installation. This means there is no complicated financing, no interest payments and no third party involvement – just you and the installer – and as the system owner you may be eligible to claim any solar grants or incentives on offer.
One potential downside to this option is what is known as ‘opportunity cost’. This is the loss of the alternative uses for that money, had you not spent it on solar panels.
For example, there could be a financial cost, since you might have paid off your mortgage or other loans more quickly, thereby reducing your interest payments, or earned interest on the money in the bank.
Alternatively, it could mean you shelve your plans for a home renovation, a new car, or a once-in-a-lifetime vacation to pay for your solar panels.
Before deciding to pay outright, weigh up the benefits of ownership against the opportunity cost and ongoing maintenance to be sure it’s the right option for you.
#2 Solar Energy Loan
If you’d like to own your solar panels outright so you can take advantage of the incentives that are currently on offer, but without spending your savings, a wide range of loans are available with varying repayment terms, interest rates, credit requirements and security mechanisms.
Solar loans are offered by banks, credit unions, state programs, utilities, solar developers and private solar financing companies.
In some states, loans can be repaid through your monthly electricity bill with participating utility companies using a mechanism called on-bill financing.
Some demand collateral to secure the loan, such as a home equity loan, but unsecured solar loans are also available.
As with any type of loan, repaying it as quickly as possible will minimize the amount of interest you pay overall. However, it can be beneficial to structure a solar loan over a longer term so that the monthly repayments are less than the savings on your electricity bill, and you can cut your monthly outgoings right from the start.
#3 Home Equity Loan or Line of Credit
Home equity loans are simply loans that use your property as collateral.
A traditional home equity loan allows you to borrow a lump sum to fund your solar PV purchase, while a home equity line of credit (HELOC) offers you a revolving line of credit, similar to a credit card.
The advantage of home equity loans and HELOCs is that the interest rate is generally much lower than and unsecured loan or credit card, and you may also be able to offset the interest payments against your tax bill.
However, your home may be at risk if you fail to make your repayments, so only choose this option if your income is reliable.
If this option appeals to you, you’ll need to check that you have enough equity in your home. Lenders normally require you to maintain 10 to 20 percent equity after you take out a home equity line of credit.
#4 Energy Mortgages
There are two kinds of energy mortgages: Energy Efficient Mortgages (EEMs) are for homebuyers looking to purchase homes that are already energy efficient, and allow them to qualify for bigger loans to further upgrade their energy efficiency.
Energy Improvement Mortgages (EIMs) are used to buy existing homes that will have energy efficiency improvements made to them. An EIM allows you to include the cost of improvements – such as solar panels – in the mortgage without increasing the down payment and allows you to use the money saved in utility bills to finance the energy improvements.
To qualify for an EEM or an EIM, you’ll need a home energy rating to provide the lender with the estimated monthly energy savings and the value of the energy efficiency measures.
#5 Residential Property Assessed Clean Energy (R-PACE) Programs
In some areas, long-term, low-cost financing is available through a Residential Property Assessed Clean Energy, or R-PACE, program.
The R-PACE is a way of funding energy upgrades by attaching the costs to your property tax bill through a special tax assessment that remains in place for the life of the obligation.
The cost of the upgrade is paid off over a fixed period, which can be 20 years or longer, at very attractive rates of interest.
This can make it more attractive to buy a solar photovoltaic system if you think you may want to sell your home before the system is fully paid off, since there’s no risk of being burdened with an outstanding debt for something you no longer own.
If you’d rather not own the solar panels yourself, there are some solar rental options available.
#1 Solar Lease
Solar leasing is the simplest type of third-party ownership. At little or no upfront cost, a company will install the system at your home, retaining ownership but also taking responsibility for maintenance. In return, you pay a monthly fee for the duration of the lease – typically between 15 and 25 years.
Because you don’t own the solar panel system, you don’t get the benefit of any grants, tax rebates or other government incentives, but you do get to use the electricity that’s generated.
The best solar leases also include a performance guarantee, so you know in advance how much electricity the solar panels will produce and the minimum you will save on your electric bills.
Although most solar leases include a maintenance contract, it may not cover replacement of parts, such as inverters, and the monthly payments may be subject to an escalator clause, meaning they will increase over time.
#2 Power Purchase Agreement
The second type of third-party ownership is a solar power purchase agreement or PPA.
A PPA is similar to a solar lease in many ways: You don’t own the solar panels and you can’t benefit from subsidies or incentives, but there is no upfront cost or ongoing responsibility for maintenance.
With a solar PPA, a project developer installs, owns and operates the system at your home and agrees to sell the electricity produced by the system to you at a fixed rate, typically competitive with the local electricity rate.
Check details of the agreement carefully to see how the price offered per kilowatt hour compares to your current rate. Some PPAs offer an escalating rate, so you should consider whether local electricity prices are likely to increase at the same rate in the future when calculating potential savings.
Collective purchasing of solar systems
Even if your home is unsuitable for a solar panel installation, or if you’re renting, there is a way for you to participate and benefit from solar panels.
Shared solar systems can be community- or third-party-owned and the financing can be structured in several different ways.
Community Shared Solar Program
Shared solar arrays can be located onsite – on a multi-unit apartment building, for example – or off site, on sites such as commercial rooftops, brownfields and municipal land that might otherwise have little commercial value.
Instead of each individual hiring professionals to carry out a site assessment, finding a suitable installer, and buying solar panels, a shared solar program can divide the costs amongst all participants.
Aggregating customer demand can also reduce the cost significantly and a shared scheme makes it easier for you to invest at a level that suits your budget. Furthermore, it’s a safe investment for participants who expect to move home, because each solar share can be transferred or sold to someone else.
Check for local schemes to find a shared solar program you can join. The National Community Solar Partnership aims to expand solar access to all Americans and has information about initiatives and resources including the SunShot Initiative and Solarize campaign.
Solarize began as a grassroots movement in a single neighborhood in Portland, Oregon, to help local residents install solar power. It quickly caught on throughout the city and beyond and, since 2011, dozens of communities across the USA have launched their own neighborhood collective purchasing programs.
The Solarize Guidebook is a community guide to collective purchasing of residential PV systems. It can be used by project planners and solar enthusiasts who want to create their own Solarize campaigns.
So what solar financing option will you choose?
Whether you’re looking to splash some cash or save your money for a rainy day, there are plenty of ways to finance your solar dream.
It need not cost you thousands of dollars – simply choose the best solar panel financing option for your situation and you could be saving money and carbon in no time. Good luck!