Are you thinking of leasing solar panels? Please think again before you do.
The price of solar panels has decreased radically in the past decade, but they can still be costly. If you lease solar panels, you don’t pay for installation. For some people, this makes it seem like they’re getting the system for nothing. So, why shouldn’t you lease solar panels?
For starters, nothing is free! But more importantly, you won’t own the solar panels and they won’t be part of your homeownership, nor your personal assets. Sure, you won’t pay as much for the solar system upfront. But you’ll pay the leasing company a monthly fee for decades, and will end up paying more in the long run for many reasons.
Of course, there are some advantages, which is why some people do lease solar panels. These include the fact that there isn’t any upfront cost. Also, the leasing company will be responsible for the ongoing maintenance of the system. But these advantages don’t justify leasing solar panels, and I’m going to show you why.
If you can afford to pay cash for a solar PV system, that is definitely the easiest way to go. You then own the solar system and get all the benefits, including the opportunity to get your house off the grid. And you won’t put any more debt on your personal balance sheet either. But that’s not to say financing (still owning) the solar system has benefits as well. Ultimately, you will also save more money than you will if you opt for a lease or any other finance option.
So, let’s dive a little deeper and see why you definitely shouldn’t lease solar panels. I’ve come up with 16 very good reasons, and I’m going to share them with you. But first, let’s look at the various options available to finance solar photovoltaic (PV) systems.
Table of Contents
- How to Finance Solar PV Systems
- Comparing the Costs of the Different Finance Options
- 16 Good Reasons Not to Lease Solar Panels
- 1. You Won’t Own The Solar Panels.
- A Real Life Story on Leasing Solar Panels
- 2. You Won’t Have Access to Solar Renewable Energy Credits.
- 3. You Won’t Qualify for the Federal Solar Tax Credit.
- 4. There Is a Possibility of Higher Property Taxes.
- 5. Leased Solar Panels Do Not Add Value to Your Property.
- 6. You Have to Pay for the Energy You Generate.
- 7. A Lease Is Personal Property and Not Real Estate.
- 9. It Isn’t Easy to Move Solar Panel Systems.
- 10. You Will Be Locked Into Monthly Repayments for Many Years.
- 11. Most Lease Agreements Have Restrictions.
- 12. Site Upgrades May Be Needed.
- 13. Transfer of Ownership Is Often Problematic.
- 14. You May Be Forced to Drop the Selling Price to Pay for the Lease.
- 15. A Lease Reduces Your Potential Return on Investment.
- 16. Quality Maintenance Isn’t Guaranteed.
How to Finance Solar PV Systems
But since not everybody has access to capital, other financing options do come into play. The various options are:
- Lease agreements
- Solar power purchase agreements (PPAs)
Solar Lease Agreements
A solar lease is a finance option that enables homeowners to have a solar PV system installed, often at no cost, and then pay an agreed rental fee for the system. The system is owned by a third-party developer who remains responsible for maintaining the system at their own cost.
You pay the developer or leasing company, as well as the utility company so that you stay connected to the grid. The reason for this is to ensure you have electricity even if your solar system doesn’t generate enough power.
Essentially, as the Solar Energy Industries Association (SEIA) points out, all you own is the power the solar system produces.
While you get the benefit of the electricity generated by the solar PV system, the leasing company gets all the other benefits–including tax credits, solar renewable energy credits (SERCs), and any other incentives that are attached to the solar system.
Solar leases are usually for a 15- to 25-year period of time, depending on the leasing company’s terms. When the contract ends, you will typically have the option to renew the lease, buy the panels, or have them removed.
If you decide to buy the solar panels, they may cost less than new ones would, but, of course, they will have been in service for many years. If the system is old, the technology will likely be at least a little bit dated and worn. But be aware that unlike motor vehicles that consistently lose value over time, the value of a solar panel system could increase (based on home value, electricity rates, and other desirability factors).
Another problem is that if solar leases aren’t set up very carefully, or the lessee doesn’t follow all the implications of the lease, they can easily become trapped in a system that makes their home more difficult to sell before the lease term expires.
Solar Power Purchase Agreements
A PPA is similar to a lease, but instead of paying rent, you pay for the electricity the system produces. It involves a third-party developer who assists with design, permits, financing, and installation of solar panels at very little, if not zero, cost. The developer is also responsible for the operation of the system and its maintenance while the agreement is in place.
The PPA solar company then sells the power generated by the solar system to you at an agreed rate. This rate is typically about 20 percent less than you would be paying the local utility company, but it varies.
The benefit for the consumer is that the lower electricity price offsets their purchase of electricity from the grid. But, as with a lease, the developer gets the benefits of tax and energy credits, and all other incentives.
According to the SEIA, most PPAs range from 10 to 25 years. At the end of the term of the contract, you might be able to extend the PPA. Alternatively, you could arrange to buy the system from the developer or ask the company to remove the system (which might incur a fee). You would probably only do the latter if you had a maximum-length PPA contract and the technology was outdated.
If you don’t have enough cash to buy a solar system, the next best option is to take a loan. Of course, like solar leases and PPAs, you will have to pay off the loan over time, but the big difference is that you will own the system as well as the power it produces. You will also have the opportunity to benefit from energy and tax credits and other incentives. One other big one here – you get to keep control over your house and your solar. I’ll get into that a little bit later.
Loans are available from lenders and some solar developers, and they can cover both the purchase and installation of the system. Even though the loan may be subject to security interest or a lien held by the lender (just like home loans), you will own the system.
New Jersey’s Clean energy program website shows that there are many choices when it comes to lenders for solar loans, as an example:
- Credit unions
- Solar developers
- Solar financing companies
- State programs
- Utility companies
As they point out, possible disadvantages of a solar loan include the fact that not all homeowners will qualify. There may also be minor maintenance and repair costs, and your insurance costs might increase a little because you own the system and will therefore be responsible for it. You’re also paying interest on a loan which adds to your monthly cost a bit.
Tax Implications of Owning a Solar System
However, some loans may be tax-deductible, which can be a big plus. For example, as the National Renewable Energy Laboratory points out in a document that explains solar leasing for residential PV systems, if you are able to take out a home equity loan, the interest on the loan may be tax-deductible. It makes sense to get the advice of a reputable tax professional if you’re considering this option. Also, by the owning the system, you get to keep the 26% tax credit (extended through 2022). If you don’t own the system – you will not get this benefit.
Comparing the Costs of the Different Finance Options
The Midwest Renewable Energy Association has developed a useful, easy-to-use tool to help businesses, municipalities, hospitals, and universities to compare the different financial strategies available for solar systems.
Even though it is intended for institutions rather than private residences, it provides an excellent resource to help potential purchasers of solar panel systems familiarize themselves with the different financing options.
The options the tool analyzes are the same as the options we have discussed above, namely:
- Direct ownership (paying cash)
- Debt financing in the form of a loan
- Operating lease
16 Good Reasons Not to Lease Solar Panels
Even if you don’t have the cash to buy your solar panels, in most cases, I’m fully convinced that it’s not a good idea. PPA agreements are similar to leases, and I advise avoiding these, at least for residential solar systems. It would be better to take a loan to pay for the system so that you own it.
Solar systems that are owned, even if they have been financed, are really the best option if you want to make the purchase viable and get a decent return on investment (ROI).
Here are 16 important reasons why you definitely shouldn’t lease solar panels. Consider them all carefully before you make a decision to lease solar panels.
1. You Won’t Own The Solar Panels.
The solar system is owned by a third-party developer, not you. If you lease the system or have a PPA, SRECs are normally owned by a third-party developer.
Furthermore, because you don’t own the panels, you don’t have control over them. You also won’t get the added benefits from various financial credits (see 2 and 3 below).
A Real Life Story on Leasing Solar Panels
I’ll actually start this out with a couple, potentially very scary stories/warnings.
As I’ve gone to purchase homes both for myself and for the company to do our net-zero home renovations on, I sometimes run into properties with descriptions like this:
Beautiful small home nestled in the heart of XYZ city. Price is $220,000 with solar panels, $180,000 if you pay of the solar system.
Now, in the madness of the real estate market and trying to find a home in general, you have to figure this one out. What it means is that the sellers had signed a solar lease, and they cannot sell the house without paying off the system contract price to the solar company that owns this lease.
The realtor, in this case, had told me that the previous couple had made an emotional decision and signed, but now there was a lien on the house and the system has to be paid off by $40,000 before they can sell.
Since we design solar systems here and after taking a look at the roof, I knew the system only cost the installer a max of $15,000 or so, given the amount of panels and overall KW size.
This isn’t to scare you off immediately here, but these are real stories. Be careful of what you’re signing up for and read these contracts fully, and probably multiple times over.
2. You Won’t Have Access to Solar Renewable Energy Credits.
SRECs show how much energy is produced using solar power. Although not available in all U.S. states, where they are available, homeowners can earn one SREC for every 1000 kilowatt hours they produce using their solar panel system.
According to EnergySage, an online marketplace developed with funding from the U.S. Department of Energy’s (DOE) Sun-Shot program, in some states this is worth more than $300. This does, though, depend on supply and demand as well as state legislation. It’s a complicated system, but some owners of solar power systems can make a sizable income from SRECs.
If you lease the system or have a PPA, SRECs are normally owned by the third-party developer.
3. You Won’t Qualify for the Federal Solar Tax Credit.
Federal solar tax credits are being gradually phased out and will not be available for residential properties starting in 2024. But while they are still available, if you opt to lease your solar panels, the company you lease from will enjoy the financial rewards.
At this point in time (2021), if you own your solar system, you can deduct 26 percent of the cost of the system from your taxes by getting a Federal Solar Tax Credit. That big discount is a great motivation to buy your solar system outright.
This 26% credit has been extended through the end of 2022, drops to 22% in 2023, and in 2024 it will decrease to 10 percent and will only be available for commercial/business properties.
This administration is very pro-renewables though, and I wouldn’t be surprised if this was extended in the future as well, but we’ll see.
So, take advantage of it while you can.
4. There Is a Possibility of Higher Property Taxes.
There is little doubt that a PV system will help to raise the value of your property IF you own the system. But, depending on the policies in place in your state, the authorities might revalue your property when you install solar and increase the property tax that you pay.
That’s not a deal-breaker if you can recoup the additional tax by earning SRECs or federal solar tax credits. But once you’re locked into a lease agreement, the developer gets the financial benefits while you’re stuck with the taxes.
Many cities, counties, and states, also waive property taxes on solar, along with the sales tax to purchase the system, along with other potential benefits. It just depends on where you live and you’ll have to research your local situation.
5. Leased Solar Panels Do Not Add Value to Your Property.
Leased solar panels are excluded from property appraisals. This means that they are not an asset, which, in turn, means that if you lease your solar panels, they won’t help you earn more money for the sale of your home.
Once you have paid the lease, unless you then buy the old system, you will have no asset to show for your long-term spending.
This is one compelling reason why many purchasers don’t want to take over a solar lease when they buy a house. It’s not that they don’t want solar power, they simply recognize the benefits of owning the equipment.
6. You Have to Pay for the Energy You Generate.
Because you don’t own your solar panels, you will have to pay a monthly fee to use the energy that your solar panels generate. If you owned the system, this energy could be 100 percent free, as it is in my sustainable, net-zero home.
7. A Lease Is Personal Property and Not Real Estate.
A lease is a personal property contract and doesn’t apply to the home, which is regarded as real property. So, if you sell your home and don’t want to take the solar panels with you, you will have to persuade the buyer to take over your contract.
While some buyers are willing to take over solar leases, there is no way of knowing in advance. Also, buyers will need to apply for credit before they take over a solar lease.
These factors can make a house more difficult to sell and might prolong the process.
8. A Solar Lease Can Make It Difficult to Sell Your Home.
Solar leases are seen as an obstacle by many real estate agents selling solar homes. We discovered that solar homes can sell 20 percent to more than 100 percent faster than those without solar. But if there’s a solar lease in place, they tend to sell more slowly. This is primarily because they complicate the selling process.
In addition to my own stories above, here are a few examples of professionals who have found that a solar lease can make it more difficult to sell a home.
Janelle McGill, a Fort Collins real estate agent and consultant who offers free classes for agents, homeowners, solar installers, and utility companies, maintains that leased solar panels don’t add any real value to homes. This is because buyers are sometimes unwilling to take over solar leases. If buyers do agree to a transfer and the process is delayed for any reason, it will delay and might even cancel a closing.
We agree with her sentiments: while there are reasons people lease solar panels, an easier real estate transaction isn’t one of them!
Blake Guinn, a Nevada real estate agent, is an expert in the realm of residential solar systems and property sales. He warns that third-party-owned systems are very difficult to buy and sell.
Brett Bouchy, the CEO of Freedom Forever, a Californian solar panel installation company, agrees that leased solar systems don’t add value to homes and can make it harder to sell them. He also finds that convincing buyers to take over solar lease agreements isn’t easy and warns that buying out leases can be very costly.
Another Quick Study About Solar Leases
On the first net-zero renovation project we finished, I went after the low rates and refinanced at the time. This involved having the lender hiring and scheduling a new appraisal of the property.
Literally the first question the appraiser asked me was:
“Do you lease or own the solar system?”
Why did he ask me this? When asked why that was his first question, he said that leased systems cause so many complications on home value and resale value that it actually decreased the value of the home in the local market.
When he found out that I owned it there was a visible big sigh of relief on his end, because he really liked the project and the whole net-zero project. He then told me a leased solar system had the potential to ruin the whole concept.
9. It Isn’t Easy to Move Solar Panel Systems.
It isn’t that easy, and may not even be possible, to relocate solar panels from one house to another. If it is feasible, you will also have to cover the costs, which might mean it isn’t a financially viable option. Also, solar systems are designed for specific properties, so the design might not work for a different house.
Viability will depend on the condition of the new roof and other physical and environmental factors. You will also need approval from your local authority, and/or local government commission, utility company, and possibly a homeowners’ association.
The last company in Florida here that quoted removing panels just to reroof the shingles quoted $200 per panel. Most systems have 12-20 panels or so. Either way you slice it, it’ll cost you thousands of dollars to remove the system and patch the roof.
10. You Will Be Locked Into Monthly Repayments for Many Years.
Lease agreements are usually 10 to 25-year agreements. This means that you will be contractually bound to pay the leasing company regular payments for the duration of the lease.
To get out of a solar lease you can opt for a buyout of the agreement, buy the solar system at market value, relocate the panels, or transfer the lease to the new homeowner.
Some lease agreements do include a buyout period in the contract, but usually only once the lease has run for at least five to seven years.
11. Most Lease Agreements Have Restrictions.
It is common for leases to restrict certain activities or developments the property owner might want to carry out. For example, lessees may not be allowed to replace the roof or build any structure on the property that might cast shadows on the system.
Also, the leasing company will need access to your roof to be able to maintain the solar panels for the duration of the lease. This may not always be convenient for you, the homeowner.
According to Choose Energy, another factor is that leasing companies tend to design solar systems to fit their specifications rather than being guided by the number of panels homeowners want or where they want them to be placed.
When you buy the system outright, you have considerably more freedom determining the size of the system and how it is installed.
12. Site Upgrades May Be Needed.
Sometimes third-party developers require property owners to do upgrades to ensure that their solar PV system maintains its efficiency. If trees grow and shade the panels on the roof, they might insist that they are trimmed or even removed.
Their motivation would usually be to ensure maximum energy is produced so that they can earn more SERCs. But it’s going to cost you money, and you will have to comply when they make the demands.
While upgrades may well be beneficial for the property, they may not be quite what you were planning or what you would otherwise prioritize.
13. Transfer of Ownership Is Often Problematic.
In point 10, we said you have four options if you want to get out of a solar lease. When homeowners sell, transferring the lease into the name of the purchaser usually seems to be an obvious solution. But it is far from simple and can be seriously problematic.
A solar contract requires the new owner to take over the lease and the terms previously agreed on with the leasing company. Often, new owners would rather own solar equipment, especially if the system was installed 10, 15, or more years before. Solar technology is changing all the time and old equipment might be obsolete.
If this happens, you will be liable for the rest of the lease term and any fees associated with removing and/or relocating the equipment.
If the purchaser does agree to transfer the solar lease into his or her name, because solar systems are owned by a third party, the lessor will have to assist with the transaction. This might seem like an advantage, but it can be the cause of delays.
14. You May Be Forced to Drop the Selling Price to Pay for the Lease.
If you can’t get the person who wants to buy your home to take over the lease, you could reduce the selling price of the house to cover the amount they will have to pay until the lease terminates. That’s assuming you don’t want to take it with you to your new home or buy the equipment, and you can’t afford a buy-out.
If the lease still has a way to run, the price reduction could be substantial, impacting your ROI negatively.
Another option could be to continue paying the lease while the new owner gets the benefit of the solar equipment. And that is not an option anyone is going to like unless the lease is nearing the end of its term. Even so, it doesn’t make financial sense.
15. A Lease Reduces Your Potential Return on Investment.
Buying a solar PV solar system for your house is undoubtedly an investment, and one that will reap dividends for decades to come. But you must do it right to avoid anything that will eat into the money you are going to save by going solar.
An important point to remember is that lease payments generally increase by a certain percentage every year. The longer the lease, the higher the payment will go.
When I set out to prove that it was possible to renovate a house and make it a sustainable net-zero home on an affordable budget, I set very specific goals. One of them was to power the whole house with efficient, renewable, solar energy without the costs impacting the project negatively.
If I had opted to lease my solar system, I know that this would have reduced my ROI. As it is, I’m on target and very happy with its potential. I have absolutely no doubt that owning your solar system will result in the best possible savings, which translates directly to ROI.
16. Quality Maintenance Isn’t Guaranteed.
Free maintenance is usually included for leased solar panels, but the standard of service doesn’t always live up to consumer expectations.
John McDonnell, the founder of Watthub, which is an online platform that lists solar professionals, warns that many solar systems don’t get the maintenance required. But homeowners have to keep paying the lease payment every month–even if they don’t get the full service.
In any case, opting for a solar lease just to get free maintenance doesn’t make any sense at all. If this is important to you, shop around and instead find a solar company that offers a maintenance service on purchased systems.
In the article Does Solar Really Add Value To Your Home, we took a deep dive into multiple research studies that have explored this topic. Our conclusion was that solar definitely increases the value of homes. The only nebulous factor was by how much, because things like type, size, and age of the system all impact value.
In this article, we show that if you lease your solar panels, you will not add value to your house. This is primarily because you don’t own the solar system, a third party does. You need to own the system to add value to your property.
There’s a lot to consider here, but ultimately, the only time to even think about leasing solar panels is when you don’t have the available cash to pay upfront and don’t qualify for a loan. In this situation, a solar lease entices many unsuspecting consumers who are determined to embrace the benefits of solar power.
My mission is to ensure that you recognize the potential complications and disadvantages solar leases entail. If you have an income, pay taxes, and have some cash or a good credit rating, you can buy or finance solar panels for your home.
Owned systems really are the best financially viable option.