Solar Leases: What You Need To Know

Leasing solar panels is becoming a progressively more common option for homeowners and businesses who are looking to benefit from solar energy without the expensive upfront costs of purchasing solar systems.

In a solar lease agreement, you will not own the system whereas the third-party company installs and maintains the solar panels on your property, from which you can benefit from solar energy. However, you will have to make fixed monthly payments ranging from 15 to 25 years.

Before you know about buying solar panels at the end of the lease term, hidden fees in the agreement, customization, or upgrade in the solar lease, you must know in-depth about leasing solar panels and how they work.

Moreover, you need to understand and compare solar leasing to other solar financing options such as cash purchases, solar loans, and PPA (power purchase agreements) which will help you evaluate whether leasing solar panels is the most appropriate choice to fulfill your requirements.

What is a Solar Lease? How Does It Work?

A solar lease is a money-saving option by which you can install solar panels on your property without the expensive upfront costs of needing to purchase the system. In simple words, a solar lease is a mutual financial agreement between the party (You) who pays to use the asset and the party (Solar Company) who owns the asset for an agreed-upon period. With this structure, you can access solar energy while relieving yourself from the financial burden of initially investing huge amounts.

The working is simple while you opt for a solar lease, the leasing company will install the solar panels on your roof. After that, you must pay a fixed monthly lease payment, which is usually calculated based on the system’s estimated energy production. Your payments allow you to use the panels-generated electricity, and it reduces your monthly utility bills too.

In addition to that, most of the leasing agreements include a solar power production guarantee, so that even if the panels don’t generate the agreed-upon amount of electricity, you will be receiving a refund or a reduced payment.

Generally, the monthly payments for a solar lease are calculated on a fixed basis, which might include a price escalator, meaning that the prices can increase over time to cover the rising costs. Usually, these monthly payments in solar lease cover the solar panel’s usage, maintenance, and additional services like keeping track of the system’s performance.

The length of a solar lease term is around 20 years, and in this period you can benefit from solar energy. Also, you will have several options available at the end of the lease term like lease renewal, purchasing the solar system at a negotiated price, or getting the panels removed.

Pros and Cons of Solar Lease

Like any other purchase, solar leasing comes with both advantages and disadvantages. The primary benefit is that all financing, installation, and maintenance costs are handled by the provider. If your system needs repairs during the lease term, the provider is responsible.

However, a drawback is that you’ll need to use your energy savings to cover monthly lease payments. Additionally, you miss out on financial incentives, such as federal and state tax credits, which are only available to the system’s legal owner.

Pros of Solar Leasing:

• You can install solar with zero upfront costs, as the lease provider covers all installation and labor expenses.
• The leasing company is responsible for system maintenance and repairs during the contract term.
• There’s no payback period since you’re not paying off the panels as you would with a loan.
• The panels can offer net savings if your monthly payment is less than your energy savings.

Cons of Solar Leasing:

• Lease payments consume a significant portion of your electric bill savings, leading to lower long-term savings compared to a cash purchase or solar loan.
• Since you don’t own the solar panels, only the lease provider can benefit from solar rebates and tax incentives.
• Many solar leases have an escalator clause, meaning your monthly payments may increase over time.
• Additionally, if you decide to sell your home before the lease ends, you may face some challenges.

Comparing Solar Leasing to Other Financing Options

Here is the compassion of solar leasing compared to other financing options

Cash Purchase

A cash purchase of a solar energy system refers to purchasing the system with your ownership, which means paying the full price upfront to own the solar panels and its associated equipment. It means that, once the system is installed, you are solely responsible for its operation and maintenance.

Working of Cash Purchase of Solar Energy System involves:

Upfront Payment: You need to pay the complete cost of the solar system, which might generally range from $15,000 to $24,000 after the tax credits.

Ownership: The significant benefit is that you are the sole owner of the solar panels, and you benefit from increased home value too.

Long-Term Savings: You can expect greater savings on your energy usage bills for the long term by eliminating monthly lease payments or financing it through loan interest.

Tax Benefits: As an owner of solar panels, you can take advantage of federal tax credits that cover up to 30% of the installation costs.

The benefits of cash purchasing the solar energy system are:

• Getting the maximum savings
• Increased home value and faster selling process
• No ongoing monthly payments
• Control and authority over the system
• Positive environmental impact

Here is the detailed comparison between cash purchase and solar leasing:-

FEATURE	CASH PURCHASE	SOLAR LEASING
Ownership	You have Full ownership of the solar system	No ownership as the solar system is leased from a provider
Upfront Cost	High upfront payment	Low or no upfront cost
Monthly Payments	None after installation	Monthly lease payments required
Tax Benefits	Eligible for tax credits	No tax benefits for the homeowner
Long-Term Savings	Highest savings over time	Lower savings and even the costs can escalate
Home Value Impact	Increases home value	No increase in home value
Maintenance Responsibility	You are responsible for the maintenance	Provider responsible for maintenance
Flexibility	Can sell or transfer ownership	Limited flexibility; lease terms apply

Solar Loans

Solar loans are financing options that allow you to purchase your desired capacity of solar energy systems without paying the full cost upfront. Also, this loan has the “solar system” itself as the security, meaning that if you are unable to repay the amounts, the lender has the authority to reclaim the system.

Working on Solar Loans involves:

Application: You approach a bank, credit union, or a reputable solar lender to apply for a solar loan.

Approval: Loan providers evaluate your financial health or creditworthiness, and they might ask you to pay a down payment.

Installation: Once your loan is approved, your loan funds will be used for solar panel installation.

Repayment: You must repay the loan on time, which is usually a fixed monthly payment that includes calculated interest, depending on your solar loan lender. Bear in mind that solar loans can vary in terms, interest rates, and repayment periods which range from 4.2% to 7.8% interest.

The benefits of solar loans are:

• Reduces financial burden
• No upfront cost (maybe just a smaller down payment)
• Long-term Savings
• Increased Home Value
• Loan plans tailored to different financial situations (low-interest loans for qualified borrowers)

Here is the detailed comparison between solar loans and solar leasing:-

FEATURE	SOLAR LOANS	SOLAR LEASING
Ownership	You own the solar system	Provider retains ownership
Monthly Payments	Yes Lower than leasing payments and paid to bank or financing company	Yes Payments are made to the leasing company
Tax Benefits	Eligible for tax credits and incentives	Not eligible for tax benefits
Upfront Costs	May require a down payment	Generally no upfront costs
Long-term Savings	Greater savings over time	Lower long-term savings compared to ownership
Maintenance	You are responsible for the maintenance	Provider handles maintenance
Impact on Home Value	Increases home value	No impact on home value

Power Purchase Agreements (PPAs)

The PPAs (Power Purchase Agreements) are the contracts made between you and the solar energy provider where you agree to purchase the solar-generated electricity by PV panels installed on your property. Although the solar provider continues to have ownership of the system, you will have to pay for the electricity produced rather than paying for the system.

Working of PPAs (Power Purchase Agreements) involves:

You pay a predetermined rate per kWh (kilowatt-hour) of the solar-generated electricity.

This rate can be fixed or might include an escalator possibility, which means an increase at a set rate over time, typically between 2.4% to 6% per year.

Usually, the agreement span ranges from 15 to 25 years, allowing you to take advantage of predictable energy costs and avoid upfront costs that come with purchasing a solar system.

Benefits of PPAs (Power Purchase Agreements) are:

• No Upfront Costs
• Controlled Predictable Energy Costs
• Flexible Transferable Agreements
• Managing Maintenance and Performance
• Positive Environmental Benefits

Here is the detailed comparison between solar loans and solar leasing:-

FEATURE	POWER PURCHASE AGREEMENTS (PPAs)	SOLAR LEASING
Ownership	Solar provider owns the system	Solar provider owns the system
Payment Structure	Pay per kWh generated	Fixed monthly payment
Upfront Costs	None	None
Cost Predictability	Variable based on production	Fixed monthly fee
Maintenance Responsibility	Provider handles maintenance	Provider handles maintenance
Impact on Property Value	No impact  (because the system is owned by the provider)	No impact  (because the system is owned by the provider)
Contract Length	15 to 25 years	15 to 25 years
Potential Savings	Savings tied to energy production	Savings based on fixed payment vs. utility rates

Is Leasing Solar Panels The Right Choice For You?

If you are looking to utilize renewable solar energy without any upfront costs, then definitely leasing solar panels can be an attractive option rather than purchasing a solar system.

But before you make your decision, it is essential to consider the 4 important factors that might have an impact on your experience and financial outcomes.

Here are the 4 factors to be considered in evaluating:

1. Financial Commitment and Long-Term Costs

Generally, leasing solar panels means a long-term commitment, which spans around 15 to 20 years or more. Initially, you might feel beneficial as it reduces your upfront costs, but you must question what if the total cost of leasing exceeds the amount you would pay for electricity without solar panels. Sometimes, the cumulative lease payments go higher than electricity bill savings, which becomes financially less advantageous for you in the long run.

2. Ownership and Equity

When you do not have ownership through leased solar panels, there is no equity and once after the lease term ends, you have zero authority over it. This could be a major disadvantage if you are planning to stay in your home for the long term and enjoy the benefits of reduced electricity bills without ongoing payments.

3. Impact on Home Value and Marketability

Leasing solar panels can affect your home’s value in the market if you are planning to sell your property because buyers are deterred by the existing lease agreement.

4. Credit Score and Financing Options

Your credit score majorly influences your solar leasing options because most companies offer better terms based on higher credit scores. Whereas, if you have a lower credit score, there are fewer chances of getting a solar lease option for you.

Can I Buy the Solar Panels at the End of the Lease Term?

Yes, Of course, you can buy the solar panels at the end of the lease term, as most of the solar leasing agreements include a “buyout” option. By this, you can purchase the solar panels at a price based on their estimated fair market value during the time you decide to buy them.
However, this option is often included in the lease contract, and you will be able to avail of it after a specified period, which is after 5 to 7 years of being in the lease.

Most importantly, you must review your lease agreement thoroughly so that you will understand all the terms and conditions related to the buyout option, which might include details of possible fees to be paid or other applicable valuation methods.

Are There Any Hidden Fees in a Solar Lease Agreement?

Yes, There can be hidden fees in a solar lease agreement, and you must be aware of such fees that might not be immediately easy to identify. These can include:

1. Monthly Lease Payments: You will be paying this primary fee for using the solar panels, and you must understand how these payments might get more expensive over time if there is an “escalation clause” in the contract.
2. Early Termination Fees: In cases where you decide to cancel your lease before the completion of the term, you will have to bear the early termination fees. Sometimes, these fees are so scary that they can completely wipe out the savings that you expect to get from solar.
3. Buyout Fees: Even if you wish to get rid of all these hidden fees by simply buying out, it is not as simple as you think. It is because you chose to end the term earlier so you have to pay a buyout price which might be more expensive than expected, based on contract terms.
4. Maintenance and Repair Costs: While many leases cover maintenance, some agreements demand you pay for specific repairs or maintenance tasks.

Therefore, you must be responsible for thoroughly reading your lease agreement to avoid later disappointments and shocking demands regarding these fees.

Can I Customize or Upgrade My Solar System With a Lease?

No, You cannot customize or upgrade your solar system with a lease because most of the solar lease agreements make it clear that the leasing company retains the ownership of the solar panels and the entire system.

Therefore, if you want to make any modifications or upgrades, you would have to seek approval from the leasing company. However, the solar leasing companies might not allow such changes to be done on solar panels that are owned by them.

Generally, a solar lease lasts up to long-term ranging up to 20 years or more so if you would like to add more panels or make it an efficient model, you have to consult the leasing company.

If you are considering making future enhancements or customizations to your solar panels, then it is always best to purchase the solar system instead of leasing it. Not just the equipment, but also you get numerous benefits if you are the sole owner of your solar system.

Also, if you had purchased the solar panels using a solar loan or other financing ways through a private lender, then you might be able to make certain customizations or upgrades to the solar panels.

Note: Most solar leasing companies would require you to notify them about any queries or doubts because they retain the ownership of the panels. In that case, you cannot make any changes by yourself and if any activities are noted, it might lead to serious legal consequences. So, kindly inform the solar leasing company about the changes you wish to make.