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Posted On: March 6, 2020

Ultimate Guide to Solar Financing

Spend stimulus check for solar power

Solar panels are an excellent long-term investment. However, many homeowners explore solar financing options due to the significant upfront cost.

The good news is the price of solar PV systems continue to drop as technology improves, and manufacturer costs go down.

Plus, now more than ever, homeowners have ample options to pay for clean energy. But with so many solar financing options available, homeowners face an increasingly complicated marketplace.

As a homeowner, you may be frustrated with having to choose between different packages and vendors. The differences between them may not be so noticeable, either.

This guide breaks down three different financing options—leases, PPAs, and loans— to help you discover the best way to finance solar panels for your home.

Understanding Solar Financing Options for Homeowners 

A residential solar PV system usually costs between $15,000 and $35,000. This cost is roughly what you’d pay for a brand new car. Like a new car, paying for it upfront can put a massive dent in your savings.

That’s where solar financing comes into play.

Innovative financial solutions contribute to the exponential growth of the US solar market. Homeowners can get financing in two ways: third-party ownership and homeowner ownership via a loan.

Third-party ownership has emerged in the solar industry as one of the most popular methods of solar financing. This refers to when a solar company not only installs a solar panel system but also provides financing. These companies are often called full-service solar developers.

This type of ownership allows homeowners to avoid high, upfront system costs and instead spread out payments over time. Homeowners also breathe easier knowing some or all of the responsibility for system operation and maintenance on the third-party owner.

Currently, more than 60% of homeowners who install solar take advantage of third-party ownership.

Third-party ownership arrangements primarily happen through two models: solar leases and power purchase agreements (PPAs).

Another option arises when the installer is different from the financial lender. A solar financing lender might be a bank, a solar company, a credit union, a public-private partnership, a green bank, or a utility. Visit our blog to find out more about the best states for solar power.

Solar Leasing Agreement Explained 

When choosing a solar leasing agreement, a homeowner enters into a service contract. This contract sets up a schedule (usually monthly) of predetermined payments to a solar leasing company for a typical lease term of 15 to 20 years.

This solar company then installs and owns the solar system on the homeowner’s property. The homeowner basically leases and consumes electricity through this solar panel system. If the system provides excess power to the grid, the homeowner may get credit for that generation from the electrical utility.

If the homeowner consumes electricity beyond what the solar panel system generates, they pay the regular utility rate.

It is essential to clarify who is responsible for maintenance costs. A solar PV system may require maintenance or replacement of parts during the lease contract term.

Most solar leases cover maintenance but may not cover the cost of replacing equipment.

The main benefits of a solar lease include:

  • Eliminating most or all of the upfront cost of a system
  • Paying a set price for the equipment (and possibly maintenance)
  • Transferring operations and maintenance responsibilities to a qualified third-party owner, if permitted

Having new owners take over the lease if you sell your home

Though solar leasing is an attractive option, there are potential disadvantages. These include:

  • Not knowing for sure how much electricity the solar panels will produce
  • Not knowing exactly how much money will be saved on electric bills
  • Having applicable state or federal tax credits go to the system’s third-party owner

Some solar leases come with an escalating (i.e. increasing) payment schedule.

Homeowners should discuss escalating payment schedules when choosing a lease.

Visit our blog to learn more about the different types of solar panels.

Solar Power Purchase Agreements (PPAs) Explained 

With this type of financing, a solar finance company buys, installs, and maintains a solar system on a homeowner’s property. The homeowner then purchases the energy generated by the system on a per-kilowatt-hour basis.

This agreement is done through a long-term contract, at rates competitive with the local retail electricity rate.

Homeowners use solar energy at a prescribed per-kilowatt-hour rate while avoiding the upfront cost of the solar system, the hassle of system operations, and maintenance responsibilities.

The homeowner knows the cost of energy for the entire term of the PPA, which helps them avoid increases in utility electricity rates.

If you consider this option, you should look at your electricity bill to see how your current rate compares with the rate proposed by the company offering the PPA. Ideally, per-kilowatt-hour payments will be less than the retail electricity rate.

This rate can make your investment cash-flow-positive from day one.

Ask your contractor to calculate the projected per-kilowatt-hour rate and annual savings. If your contractor offers PPAs with an escalating rate, consider whether local electricity rates are likely to increase in the future.

The main benefits of a solar PPA include:

  • Eliminating most or all of the upfront cost of a system
  • Knowing the cost of energy upfront for the entire term
  • Having no systems and maintenance responsibilities
  • Having a positive cash-flow right away

Though a solar PPA is an attractive option, there are potential disadvantages. These include:

  • Needing to do in-depth research to compare utility rates upfront
  • Potentially facing escalating rates
  • Having applicable state or federal tax credits go to the system’s third-party owner

Solar Loans Explained 

Homeowners borrow money from a lender or solar developer for the installation of a solar PV system via solar loans. Unlike solar leasing and PPAs, the homeowner owns the installed system.

As a homeowner, you have access to a wide variety of loan offerings that have different monthly payment amounts, interest rates, lengths, credit requirements, and security mechanisms.

These loan products may offer energy efficiency improvements bundled with solar PV installation, or allow you to include roof replacement or other energy-related improvements.

Individual loans may require an asset to serve as collateral to secure the loan, called a home equity loan. Other unsecured loans do not require an additional asset outside the solar panel system to collateralize the loan.

Often solar loans structure repayment terms, so the monthly payments are less than the reduction in the amount of the utility bill. This repayment plan means homeowners start saving money right away.

Some homeowners opt to pay off the loan sooner during a shorter duration. This delays immediate positive cash flow but shortens the time needed to enter the post-loan period when monthly savings are much higher. It may be a better option for those planning to stay in their homes long-term.

Solar loans are financed through banks, credit unions, state programs, utilities, solar developers, and other private solar financing companies.

In a few states, participating utility companies allow solar customers to repay their loans through payments added to their monthly electric bill.

A small fraction of states set up state or quasi-state agencies that offer residential loan programs to cover solar.

The main benefits of a solar loan include:

  • Owning the installed system
  • Having the ability to potentially bundle with other home improvement projects
  • Having applicable state or federal tax credits go to the homeowner

Though solar leasing is an attractive option, there are potential disadvantages. These include:

  • Being responsible for maintaining and replacing equipment
  • Needing to qualify for a loan

Weighing Your Solar Financing Options

When it comes to financing solar, it’s vital to consider what benefits your situation best.

Here are some common considerations for all three options:

  • When choosing third-party ownership, the solar contractor installs solar panels at your property. You then enter a specified term agreement to pay them a below-market rate.
  • Choosing third-party ownership for solar panel financing helps save 10-30% per month over your utility’s electricity bills with no upfront investment.
  • With a third-party ownership agreement, you usually are not responsible for maintaining the solar panels, but this should be discussed with your installation company.
  • At the end of a lease, the contractor either remove the panels or sells the system to you at fair market value.
  • You are eligible for all rebates, tax credits, and other incentives offered by the government and your utility company when using third-party ownership financing.
  • For a solar loan, monthly savings on your electric bills should be higher than the loan’s monthly payment.
  • A solar loan can save 40-70% on electricity costs over the lifetime of a system. This is a big win if you plan to stay in your home for more than a year or two.
  • Solar loans have the same terms and conditions as other home improvement loans.
  • Individual states may offer subsidized solar energy loans with low-interest rates.
  • The federal government provides financial incentives for buying a system outright with a solar loan.
  • Interest earned on secured solar loans may also be tax-deductible.

Getting Started

Talk to your local solar installation company or bank to find out what type of creative solar financing is available in your area. Solar can save you money in the long-term, so investing time to find the right solution pays in dividends.

As always, we are happy to answer any of your solar energy questions. Feel free to give us a call during regular business hours or send us an email.

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