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How should I finance my solar installation?

To lease, or not to lease? That is one question. Whether ‘tis nobler to sign a power purchase agreement, or to take a PACE loan, and by doing so, break even? To bask, to profit—so much more; and by a profit, we mean a healthy one.

To say Hamlet had a tough choice would be an understatement, but it is perhaps tougher for a homeowner to wade through the complexities of the process of choosing a way to finance their solar installation. Fear not, fair friends, we at Solar Power Rocks have carefully studied the different kinds of financing available to homeowners who want to go solar and helpfully broken them down below.

All the world’s a surface onto which the sun shines, and we’re here, as always, to be your aide.

1. Pay outright

Bottom line: Pay outright if you want to make the most profit on your investment in solar panels. You take more responsibility and risk for dealing with the utility company and paying for ongoing maintenance costs, but the benefits generally outweigh the risks.

If you pay outright for your solar power system you own the panels and reap all the benefits. When we calculate return on investment for solar installations, we base our estimates on paying outright because it is the best way to ensure solar is a good investment; in many cases better than investing in an index fund.

The downside of paying upfront is, let’s be honest, coming up with the capital. You’ll pay between $10,000 and $20,000 out of pocket, depending on rebates in your state, and then get a decent-sized chunk back at the end of the first year from the big 30% federal tax credit, plus up to five years of tax credits based on your state’s laws.

After that, you make money with your system by reducing electricity costs and/or selling power back to the grid until you break even. In most states (34 and the District of Columbia, by our most recent estimations), you’ll make a better rate of return than the S&P 500. All this adds up to money for you, either in the form of profits throughout the life of your system, or increased resale price of your home if you move out while the system is still kicking out kilowatts.

Of course you’ll take on some risk, too, being the sole owner and operator of an energy generation system. But don’t worry too much—the panel and inverter manufacturers offer really great warranties that last for up to 25 or 30 years, and your equipment will likely function well for even longer. And a failure outside of a warranty isn’t typically a costly expense. Other costs of operation are more abstract—the time you spend negotiating the world of feed-in-tariffs and interconnection agreements will mean you’ll be dealing with some bureaucracy, too.

All told, buying a solar power system with cash is the best way to maximize your profit and control your energy future. And money spends the same in Georgia as it does in New York, so you can be sure to get a system, even if nobody is leasing or offering a Power Purchase Agreement  in your area.

2. Take a PACE loan, HELOC, or other loan

Bottom line: A loan can give people interested in solar a way to put next-to-nothing down, and financing options can include payments lower than the electricity savings, creating positive cash flow. The system is still yours and you get all the tax benefits and incentives, but you are also responsible for lifetime maintenance and performance.

A solar energy system adds value to your home. Quite a bit, in fact. There have been studies in California and Colorado that show what’s called a “home price premium” of $1,000 to $5,900 per kilowatt (kW) for solar installations. Even before those studies, a 1999 article in The Appraisal Journal stated that home value increases $20 for every $1 reduction in annual utility bills.

Considering the price premium for solar energy systems, many lenders now offer loans that take the added value into consideration, and finance the loans based on expected life of the system. Property-Assessed Clean Energy (PACE) loans are one kind of loan that is funded based on municipal bonds, and offered to homeowners with terms of 15 or 20 years. Many states offer PACE financing programs. The terms of the loan can be very favorable, including payments that are below the energy savings the system provides and the ability to deduct interest payments from a homeowner’s taxes.

Taking a home equity line of credit (HELOC) is another way to finance a solar energy system. Some installers even have preferred lenders they work with to provide home equity-based financing to homeowners. The loan or line of credit works much the same way a PACE loan does, but might come without some of the same benefits. If your municipality doesn’t offer PACE financing, a HELOC might be a way to get low-down payment solar.

3. Lease

Bottom line: Leases are becoming an increasingly popular way to go solar. The homeowner saves money on electricity bills, and the leasing company handles the installation and connection to the grid, and performs maintenance and repairs. They also get the tax benefits of the system and any other incentives available.

Solar is such a good deal that some companies are willing to put it on your house for free. In the best states for solar, you can get a system on your house with no money down, and your lease payments will be less than your energy savings. That’s big news for homeowners without a lot of extra scratch lying around.

But wait, there’s more! The leasing company is responsible for maintaining and handling all the hard work of interconnection and selling electricity back to the utility. You just put your feet up and save money while doing the environment a solid. Of course, this also means the leasing company reaps the rewards, including tax breaks, performance payments, and renewable energy credits.

The other catch is leases aren’t available in all states, because not all states have favorable economic climates. The sun shines everywhere, but stick-in-the-mud lawmakers rule over half the states. If you’re in one of the best states for solar, you have a great chance of finding a company that will lease you a great system for decades to come. And many leasing companies offer a chance to buy the system at the end of the 10- to 25-year lease term, or start a new lease.

4. Sign a Power-Purchase Agreement (PPA)

Bottom line: Like a lease, a PPA means a homeowner can get solar for zero down, provided they agree to buy the energy a solar system makes for a specified term and rate. The advantages and trade-offs are much the same as a lease, too.

A Solar Power Purchase Agreement is a lot like a lease. Really, one of the only differences is the agreement with the installer—in a lease, you agree to have the system on your property and lease its use over a given number of years. In a PPA, you agree to purchase the electricity a system generates.

Just like in a lease, the PPA company installs and maintains the system at no cost to you, and they reap the benefits, too. A PPA is designed to be easy for the homeowner; just sign on the dotted line and pay the company as agreed, and you’ll see lower electricity costs overall. You can usually buy the system at the end of a PPA, too, or sign a new agreement. Terms range from 6 to 25 years.

All this is great if you can find a company that offers PPAs in your area, the economics are the same as a lease—the PPA company makes money based on whatever state incentives are available. Finally, just like a lease, you can buy the system at the end of the agreement, sign a new agreement, or have them remove the panels at their expense.

Which is right for you?

If you’re in a great state for solar, like New Jersey or Massachusetts, all these options are on the table. In states with little or no economic incentives for residential solar, lease and PPA deals are hard to come by, but buying outright or taking a home-equity loan is almost always an option.

The best way we can think of to get the straight dope on solar in your area is to sign up to get quotes from local installers we trust.

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One thought on “How should I finance my solar installation?

  1. Anonymous says:

    I live in South Dakota, so I will have solar power like…never.

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