Over the decades as the solar industry has developed, we have seen many different economic methods of switching to solar power. Overall, the cost of solar has dropped substantially over the past decade. Back in the early 2000’s solar could cost as high as $12.00 / watt! Meaning a 10 kW system (which is a fairly standard size for an average home) cost $120,000! Needless to say, there wasn’t much of a financial incentive back then. Nowadays the cost of going solar is much lower, on average in the $3-4 / watt range depending on what market you are in (before incentives). Even though costs have dropped a lot, solar is still a substantial investment into your home or business. There are three primary economic methods of switching to solar power for your home or business: purchasing outright, financing or leasing the system. Let’s dive into the ins and outs of each of the options!
Purchasing the System Outright
When possible, purchasing the system outright is by far the best way to maximize your return on investment and instantly reduce or eliminate your monthly electric bill (depending on percentage of offset). By purchasing the system outright, you avoid any interest on a loan and any possible filing fixtures / liens on the property. You are essentially making one bulk payment for 25 years+ of guaranteed production from the array. The only time it would make more sense to finance the system rather than pay for it outright is if the bank is offering a very aggressive / low interest rate. Purchasing the system outright instantly raises the value of your home and many towns offer property tax exemptions for solar arrays. Even though paying for the solar array outright is most ideal, it is not always practical which is why solar financing products are available.
Financing a System
Because of the potentially large upfront cost of solar, and the fact that it takes time to get the tax credit back many people elect to finance the system though a bank, credit union or private lender. This is very similar to other big-ticket items such as houses and cars. While solar loan products have different features, most are generally structured around the Solar Investment Tax Credit (ITC). With the ITC qualifying projects can get up to a 30% tax credit on their federal return. Because taxes are filed in the subsequent year from the project, it can sometimes take up to 15 weeks or more to receive the credit. Banks structure solar loans around the ITC because they understand how this work. Most solar loans base the initial monthly payments on the net investment of the system, as though they only financed 70% of the project. They allow a predetermined re-amortization period that gives the home or business owner time to file their taxes and receive their credit. Once received they are expected to put it towards their loan, or the payments will increase. Doing this makes the initial monthly payments much lower than if they had to finance the entire amount upfront and more comparable to what they are already spending month to month on electricity. Therefore, even when financing the project, it’s possible to see month to month savings right away. The downfall of course is that with the added interest of the loan, the overall return on investment time is increased. The good news is a lot of loan companies do not penalize for early payment, and the loan can be paid off at any time. We work with local credit unions which often have the best terms! Other than purchasing or financing a system the last option is a solar lease.
Solar leases and Power Purchase Agreements
The third economic method for going solar is through a solar lease or power purchase agreement (PPA). A solar lease is very comparable to a car lease where you don’t own the equipment but pay to use it, or in the case with solar pay for the energy produced by the array. With a solar lease you typically pay a fixed monthly amount for the solar equipment, and in turn the energy produced by the array offset’s your utility bill. With a PPA you pay per kWh for the energy that is produced by the array. In both cases the monthly solar payment, or cost per kWh is ideally less than what you are already paying providing a monthly savings. This may seem idea at first but both leases and PPA’s often have a guaranteed annual escalation rate meaning it’s possible that you could eventually end up paying more through a lease or PPA than you would if you just stuck with your utility company. Furthermore, lease and PPA agreements often come with liens and filing fixtures on the home, which can make selling the house down the line very difficult. The new homeowners must agree to take over the remainder of the lease / PPA or purchase the system and an incredibly inflated cost, with no tax incentive since it was taken the installation company when the solar was originally installed.
There are certain situations where a solar lease or PPA may make more sense. For very large installations that required huge upfront costs it can be difficult to find a single financer to back the project. In these cases, multiple financers may combine purchasing power and back a leased system. The other situation where a lease or PPA may make more sense is when a homeowner does not have the tax liability to claim the tax credit. In these situations the financials probably will not work out for a purchase or finance model so a lease may be the only option.
There are many different economic models for switching to solar power. While going solar is always better than sticking with the utility company there are better and worse ways to go about it. For those who can claim the tax credit it is much more beneficial to either purchase or finance a system. If a business is looking at a very large system, or a home owner does not have the tax liability to claim the tax credit a lease or PPA may be the best option.
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