Leasing vs. Owning a PV System

What's Best for Homeowners

Inside this Article

For homeowners who want to transition to solar electricity, there is no better time than the present. 2015 was the biggest year ever for PV installations in the United States, and the residential sector in particular continues to grow at unprecedented rates. Falling PV module costs, rising electricity prices, and increased awareness of PV’s financial benefits are making solar electricity an increasingly attractive option.

Growing Financial Benefits

In the past, high costs kept the majority of homeowners from installing PV systems. Many early adopters chose to go solar because of environmental concerns, or a desire to reduce their reliance on the electric power grid. In recent years, however, the solar market has opened up to an entirely new class of consumer. Today’s potential PV system owners are also motivated by the prospect of saving money on their electricity bills and making a responsible investment in their home.

Beneficial market conditions and significant financial incentives are bringing new solar customers into the market in greater volumes than ever before. The top three economic factors include:

Reduced system costs. Declining equipment prices and installation costs are directly reducing the out-of-pocket costs required of homeowners who want to install a PV system. Since 2010, the costs of going solar have fallen by 45% in the residential sector, according to the Solar Energy Industries Association (SEIA).

Increasing utility electricity costs. Climbing electricity rates add another reason to explore renewable options. Since 2005, residential electricity costs in the United States have increased by an average of 3% every year, according to the U.S. Energy Information Administration.

Federal and state incentives. Public sector financial incentives further reduce the cost of solar for consumers: the most significant being the federal investment tax credit (ITC). Property owners who own their systems outright can use the ITC to reduce their tax burden by 30% of the cost of their solar energy system. For example, if a homeowner installs a $20,000 PV system on their property, the ITC allows them to claim a $6,000 credit on their tax bill, effectively reducing the cost of the system to $14,000. State and municipal incentives can further reduce the net cost of going solar for homeowners.

Solar Bargain Hunters

These factors are expanding solar demand and garnering more potential system owners who are financially focused and likely to compare options before purchasing. These individuals want to find the best solution for their particular household, and are not necessarily interested in the simplest buying process or least expensive system.

Market research shows that there are between 4 and 6 million active solar shoppers in the United States at any given point. Interestingly, the majority of these people are not motivated by environmental reasons, but by the pure economics of switching to solar power. As such, these individuals want to understand the financial merits of each option before making a purchase. During their research process, they’re discovering that system ownership enables them to achieve a higher return on solar investment as compared to leasing.

Financial Benefits of Loans

Large solar installation companies rely almost entirely on third-party ownership, which includes solar leases and power purchase agreements (PPAs). Under this model, the solar company installs a PV system and the property owner pays the company a fixed price to “rent” the system for the duration of the agreement.

The companies’ aggressive advertising of solar leases and PPAs created an artificial upsurge in demand for leases and PPAs, as many homeowners were led to believe that system ownership was cost-prohibitive. Traditional loan options for homeowners were limited, and the options that did exist suffered from a lack of advertising dollars and brand awareness.

But as consumer awareness increases, so does the demand for PV system ownership, and the supply of new financial products increases to match it. PV system loans allow homeowners to buy their PV system outright and capture more of its value. Homeowners can access PV loans through a variety of institutions—many traditional banks and credit unions fund PV installations with home equity loans and home equity lines of credit, and specialty lending institutions focused on energy efficiency and renewable energy projects also offer loan products tailored to residential PV projects. In many cases, PV loans require no money down, thereby increasing the range of potential applicants.

Potential system owners are not restricted to traditional loan products. In some areas, public-private partnerships provide low-interest financing for PV systems. For example, the Connecticut Green Bank provides low-interest loans supported, in part, by public funds.

With property assessed clean energy (PACE) financing, homeowners can take out a loan based on their home’s equity and repay the loan, along with their property taxes, through a yearly assessment, rather than the monthly payments required by traditional loans. In most cases, the annual savings that result from installing a PV system are higher than the cost of the yearly assessment, and homeowners typically enjoy financial gains as soon as their PV system is operational. PACE is a particularly attractive option for homeowners who don’t have good enough credit to access favorable loan options, because while funding amounts and interest rates for traditional loans are determined by credit score, PACE loan amounts are determined by the property’s value. Currently, residential PACE financing programs are available in California, Connecticut, Florida, Missouri, and New York. According to PACENation, PACE financing has already supported the installation of renewable energy systems on 19,500 homes in the United States.

The Value of Ownership

When you compare multiple financing options, the benefits of system ownership are usually clear. The examples from Massachusetts and New York illustrate the relative value of a cash purchase, $0-down solar loan, and $0-down lease/PPA. These examples were developed using real-time market pricing data from the EnergySage Solar Marketplace, remote sensing technology to assess roof suitability and system size, state and federal financial incentives, and localized electricity rates. Total financial returns will vary depending on electricity cost and incentives available to homeowners. However, even in areas without state-level incentives, such as California, 20-year savings are still significantly higher for homeowners who own, rather than lease, their systems.

The first example analyzes a property in Massachusetts with a $150 monthly electricity bill. The key figure, 20-year net savings, is highlighted at the top.

The second example features a property in New York with a $200 monthly electricity bill. The differences from the Massachusetts property are due to differing incentive structures, as well as a higher electricity bill.

The $0-down solar loan (the middle column) makes it possible for homeowners to capture more of their solar energy system’s value, and provides a route to system ownership for those that cannot afford a cash purchase. Homeowners with access to solar loan products can save significantly more over their system’s lifetime than if they entered into a solar lease agreement or PPA.

Ownership = Higher Home Value

Multiple academic studies back up the assertion that ownership means better value. The National Renewable Energy Laboratory found that the levelized cost of energy (LCOE) was 19% to 29% lower for homeowners who bought their systems compared to third-party-owned systems. LCOE is an estimate of the average per kilowatt-hour cost of the electricity produced by an energy system, and can be a good way to quantify the system’s long-term value. In addition to greater savings, academic studies have also found that installing a PV system on a home increases property values—but only if the system is owned, rather than leased.

Considering that PV arrays can generate electricity for 25 to 35 years (or more), the difference between a 20-year monthly lease agreement and outright system ownership becomes significant.

Comments (2)

Mark@exactsolar.com's picture

Owning almost always works out better for the homeowner. Only certain instances -- like when the homeowner has not tax appetite (as the case may have been in the previous comment) -- make the lease more attractive.

Mark Bortman

Jim and Elaine Stack's picture

It all depends. Most of the time buying is a better return on Investment ROI. But if your older and retired some let you lease to own and my 86 year old friend did that and saved a small amount on each monthly utility to cover the lease and after 6 year he could buy the $30K system for $600 bucks.
He now also drives a 100% Electric car that he leased , then bought. The leased took all the incentives he couldn't and passed on the;lower cost to him. Now he's older and much GREENER for pennies.

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