Leasing Solar Panels: Pros and Cons

An estimated 10.6 gigawatts of solar energy generating capacity were added to the U.S. energy mix in 2017 [1]. In the residential rooftop category, solar leasing agreements were responsible for a high percentage of the new installations, as they have been for the last several years.

Solar leasing has established an indelible presence in the solar energy marketplace, and the growth of solar leasing arrangements is a major reason why solar has advanced so rapidly.

How does leasing solar panels work?

Solar leasing provides an economical entrance point for homeowners interested in making the switch to renewable energy.

Under solar leasing arrangements, a solar financing and installation company agrees to install solar panels on a homeowner’s rooftop, normally for no money down, and to make all the connections necessary to provide electrical power to the property.

In return, the homeowner agrees to pay a fee for the rights to use all the electricity the panels produce for a set period of time, usually between 15 and 25 years. Once this lease is over, the arrangement ends and the homeowner has no further financial liability.

Depending on the specifics of the lease, fees may be paid monthly, yearly, or in a lump sum. Monthly payments are the most common choice, which essentially recreates the traditional relationship between utility companies and consumers.

One alternative version of the solar lease as just described is called a Power Purchase Agreement (PPA) [2]. When choosing a PPA, the person leasing the panels agrees to pay a set price for each kilowatt-hour of electricity they consume, meaning their monthly payments will fluctuate based on how much power they actually use.

While conventional solar leasing fees generally rise at a rate of between 2.9 percent and 3.5 annually, in Power Purchase Agreements the price per kilowatt-hour is often flat for the duration of the contract [3].

Naturally, solar leasing schemes wouldn’t be attractive if the monthly fees for solar energy were equal to or higher than the fees for power obtained from the grid. But leasing fees are pegged to come in below the per kilowatt-hour costs of utility-produced power.

This allows the consumer to reduce their utility costs by 10-30 percent on a monthly basis, and that makes the arithmetic of solar leasing an unquestioned financial winner [4].

Advantages of leasing solar panels

If you’re interested in solar energy, you aren’t alone. From 2015 through 2017, homeowners in the United States installed 6,909 gigawatts worth of rooftop solar panels, which was double the amount added in the previous 10 years [5].

Solar leasing and PPAs account for over half of this total, and there are some excellent reasons why solar leasing has proven so popular.

Here are some of the advantages of solar leasing …

#1 A quick and easy entrance into the solar marketplace

Buying solar panels can be a complicated, drawn out affair. Product options must be compared and analyzed; multiple companies must be contacted; after a decision is made financing must be arranged; permits have to be obtained; and so on.

But solar leasing simplifies the process considerably. After the lease has been signed, installation can begin immediately.

#2 Elimination of upfront costs

While the costs of solar energy have come down, if you purchase rooftop PV panels you’ll still have to come up with the money from somewhere.

But zero-down solar leasing or PPA agreements require no initial investment. The equipment and the installation are both free, and all you’ll ever owe are your monthly fees.

#3 No responsibility for repairs or maintenance

If your photovoltaic panels have defects, operate at low efficiency, require cleaning, are damaged in a storm, get shaken loose during an earthquake or require an expensive new inverter, you won’t have to worry about any of it.

The solar leasing company and their contractors must take full responsibility for repairs and maintenance.

#4 You can buy your solar energy system at the end of the lease

You’ll always have the option of purchasing your solar panels after your solar lease is up, at fair market value adjusted for their age and current level of productivity.

Then again, if you want to have them removed from your home the solar leasing company will arrange it at no charge.

#5 Your solar panels will be tied into the grid

Solar energy can at times be intermittent, depending on the weather conditions, and that can create supply problems.

But solar panels that are leased will be tied into the grid, which means you can still receive electricity from your utility company if and when you need it [6].

#6 If you sell your home, you can transfer your lease to the buyer

The terms under which you can do this will be spelled out in your lease.

To qualify for a transfer, the buyer will need a good FICO score, or have paid for your home in cash, or agree to pay an extra fee to the leasing company [7].

But as long as you follow the guidelines set up by the leasing company, you should be good to go—assuming the buyer wants the solar panels, of course, given their impact on electricity costs.

Disadvantages of leasing solar panels

Solar leasing may be more quick and convenient than purchasing solar panels, but there are many reasons why buying a solar energy system might be a more sensible choice.

The disadvantages of solar leasing include:

#1 Solar leasing companies get to claim the tax credits, rebates and SRECs

If you purchase solar panels in 2018 or 2019, you’ll be able to deduct 30 percent of your costs (including installation) from your federal taxes [8].

You’ll also likely be eligible for state tax credits, manufacturer’s rebates and special benefits called Solar Renewable Energy Certificates (SRECs), which can be sold to utility companies for a profit [9].

Needless to say, these financial perks will cut your solar energy costs substantially. But if you lease solar panels, all of these benefits will belong to the solar leasing company.

#2 No net metering credits on utility bills

When you install a grid-tied solar energy system, you can sell any excess power your panels produce back to the utility company for credits, which will appear on future utility bills.

This will come in handy on cloudy days, or extremely cold days, when your solar panels aren’t producing enough energy and you need to purchase electricity from the grid.

The practice of selling solar power to a utility company is called net metering, and you can only participate if you own your solar panels [10]. If you lease, your solar leasing company will get the net metering benefits.

#3 There are no guarantees that your utility company will raise electricity prices as much as predicted

Over time trends change, and there’s no guarantee that utility companies will continue to increase prices by four or five percent on average each year.

Utility-scale renewable energy projects may reduce the costs of energy production as solar and wind technology improve, and if that happens you’ll be locked into solar leasing or PPA fees that may be non-competitive.

#4 Your savings from solar leasing will pale in comparison to your savings if you purchase your solar equipment

This is the trump card, the biggest factor that tilts the playing field toward solar purchasing.

Over the terms of a 20-year solar lease, you can expect to save about $5,000 on energy costs, compared to what you’d pay if you were getting all of your power from the grid [11].

If you pay for your solar energy system with a solar loan, you can expect to save as much as $35,000 in energy costs over a 20-year period, and those savings will rise to $40,000 if you pay for the whole system upfront in cash [12].

Leasing vs. Buying: Is Solar Leasing the Best Option for You?

The cost of a new rooftop solar energy system has fallen considerably over the past few years, and if your home is typical in size you can probably have solar panels installed for approximately $15,000—$18,000, including the price of equipment and labor [13].

Factoring in tax credits and rebates, estimates are that a rooftop solar panel energy system can pay for itself through energy savings in as little as three-to-five years, and that is a remarkable development that helps explain why residential solar purchases were more common in 2016 than new solar leasing arrangements, for the first time in many years [13].

As of 2016, the average home was using 10,766 kilowatt-hours of electricity per year [14]. At an average price of 12.95 cents per kilowatt-hour, this would leave the typical homeowner with annual electricity costs of about $1,400 a year, or about $116 per month [15].

These are figures you should keep in mind, as you contemplate purchasing solar panels and paying back the loan you’ll need to afford them.

Banks, credit unions, independent financiers and solar installation companies are all offering solar loans to qualified homeowners these days, and if you have the financial wherewithal to handle the monthly payments buying solar panels outright could be in your interest [16].

But if the terms of a solar loan are too rich for your budget, which they could be if you’re struggling to handle your bills as it is (including your utility bills), solar leasing might be your best option. With solar leasing the savings start immediately, and that might be what you want and need.

Solar purchasing will pay off in the long run, but leasing has short-term benefits that are impossible to deny. What you choose to value the most is, of course, up to you.