Solar leasing offers many of the same benefits that come with owning a solar energy system, but without the burden of a large solar loan. As interest rates rise and financing costs increase, solar leasing is becoming a more appealing choice for homeowners.
Whether you are just exploring the idea of going solar or deeply involved in evaluating your installation choices, this guide is designed to help you understand everything you need to know about solar leases.
What is solar leasing? (Solar Lease Definition)
A solar lease is an agreement between a third-party developer that installs and maintains a solar panel system on the customer’s property and a customer that agrees to purchase the electricity generated by the system at a fixed rate for a predetermined period of time.
A solar lease is just like any other lease, in that it is essentially an agreement between a person and a business that allows you to rent something valuable over a long period of time. While leasing is commonplace for apartment rentals and car sales, solar energy systems can also provide value to homeowners in a lease agreement with an installer.
Solar leases are primarily seen as an alternative to solar buying solar panels, in which you can pay cash or take out a loan to own the panels installed on your roof. When evaluating your purchasing options, it is important to know that a solar lease is similar to a solar PPA (power purchase agreement), but we’ll get into those details a little bit later.
How does solar leasing work?
While every company has its own unique processes, the solar leasing experience is fairly universal for most homeowners. Solar leases begin by designing the clean energy system and entering into a contract agreement before having the panels physically installed on your property.
When entering into a solar lease, homeowners typically receive all of the energy generation produced by their panels, while the solar company maintains ownership of the equipment. In areas with favorable net metering policies, solar power systems large enough to cover a home’s annual energy demand can dramatically reduce and replace monthly utility company electric bills with solar power.
Solar Lease Terms and Definitions
If you’re evaluating the terms of your solar lease, here are a few key definitions to know and understand:
|Lease Agreement||A lease agreement is the physical or digital contract that you sign together with a solar company that outlines all of the installation details and payment terms and conditions.|
|Lease Term Length||The lease term length is the amount of time that the contract is valid. To match the lifespan of modern solar panels, most solar leases are locked in for 20 or 25 years. (However, it’s important to keep in mind that solar panel systems have a lifespan of 25 years or more, so signing a solar PPA for the duration of the system’s life can be a smart financial decision, and many solar lease providers offer flexible terms and exit options to give customers greater control over their energy needs.)|
|Lease Payment||Your lease payment will be the amount of money that you pay the solar company each month to rent the panels and other system equipment.|
|Price Escalator||Also known as a “price-adder”, escalators can raise the dollar amount of your monthly lease payments. They are typically applied annually, but are not necessarily included in every solar lease.|
Does solar leasing really save you money?
Yes, setting aside avoided carbon emissions, the primary benefit of installing solar panels with a lease agreement is that it can save you money on your electricity expenses. By paying a flat monthly payment for your solar panels, or a fixed amount for the clean energy they provide, you can avoid costly utility electricity thanks to all of the renewable power produced by your photovoltaic (PV) system.
The exact amount of money you can save per month with a solar lease is dependent on the electricity rates in your area, as well as the energy demand on your property. As utility rates rarely decrease and are expected to continue to rise, solar leases are particularly valuable if the monthly payments are at a fixed amount or with a low price escalator.
Pros and Cons of Leasing Solar Panels
Weighed against traditional solar ownership, there are a few clear advantages and disadvantages of leasing a solar panel system. For example, depending on the terms of your agreement (as well as your average electricity expenses), it may be possible to save money within the first month of a solar lease or financed system.
Solar Lease Pro: Worry-Free Operation
One of the best things about leasing solar panels is that less overall thought and responsibility are required to access the benefits of a residential rooftop system. As the installation company still maintains control of the equipment, any issues with its operation are not the homeowner’s responsibility, with both maintenance and decommissioning typically included in a lease agreement.
Solar Lease Pro: No Out-of-Pocket Costs
While not having to take care of any maintenance issues is a stress-free benefit, it can also be a financial advantage. In lease agreements with maintenance included, you will most likely not have to shell out another single dollar in the multi-decade lifetime of your system.
On top of the fact that most agreements help lower the upfront costs of going solar, and many do not require any upfront payments, solar leases help homeowners guarantee predictable cash flows without surprise costs that can come from unexpected solar maintenance.
Solar Lease Con: You Won’t Own Your System
Without system ownership, leasing solar panels will typically disqualify buyers from cashing in on available solar tax incentives reserved for the owner of the installation. However, the federal solar tax credit may be used by the solar installer to help lower the cost of the solar lease, so this can actually be an advantage for homeowners without a lot of tax liability, such as those on a fixed income or who have already retired.
Additionally, in the event of a move, leases may also complicate the real estate sale process a bit more than a purchased system, as a lease transfer will be required for the new homeowner to sign. To make things easier, lessees may also be able to “buy out” the remaining time on their contract and just roll that cost into the price of their home.
Solar Lease Con: Lower Overall Long-Term Savings
More than anything, the primary disadvantage of a solar lease compared to solar ownership is that lessees generally save less money overall on long-term electricity expenses. Although there are some lease-to-own options in the market today, lease payments will always continue indefinitely without building any capital.
On the other hand, purchased systems can eventually reach and surpass a “break-even point” when investment costs match utility power avoided, even as the panels continue to produce new electricity.
Solar Lease vs Power Purchase Agreement (PPA)
If solar ownership doesn’t make sense for you, an installer may suggest either a solar lease or a power purchase agreement, commonly referred to as a solar PPA. While the contracts are similar in many ways, making the distinction between the two is very important before moving forward with any solar installer.
A solar PPA is named a “power purchase” agreement because you are doing just that: agreeing to purchase the power generated by the system. Within a PPA, you will buy your energy on a usage basis (much like how payment is structured with the utility), but at a lesser rate than that offered by the solar company.
For example, if you live in an area that gets snow and your panels get covered by a large storm and don’t produce electricity, you don’t have to pay for those panels while they’re not working for you. You only pay when they produce electricity.
Alternatively, in a solar lease, you do not purchase the power directly. Instead, you “rent” the equipment on your roof and receive all of the energy that is produced.
Both solar leases and PPAs offer similar opportunities to save money on electricity costs, so there is no discernible “winner” between the two contracts in terms of average savings and total value. It depends on the area where you live, how much you pay for electricity, and other factors.
For those who don’t own property but would like to switch to solar, virtual power purchase agreements (VPPAs) and off-site solar leases may be available in some areas to enable a switch to clean, green energy.
Signing Your Solar Lease
Solar leases are a particularly good option for those without the income tax liability necessary to reduce the costs of solar ownership with the Residential Clean Energy Credit. Leases can also open the door to solar adoption for those with low credit scores that prevent access to strong solar financing options.
With interest rates rising in many industries all over the world, solar leases have become a more popular option for those exploring renewable energy at home. If you’re interested in finding the best system for your property’s electricity and learning whether a solar lease is right for you, get started today with Palmetto’s Free Solar Design and Savings Estimate Tool to explore your options and savings today.