But giving up ownership of your system to a leasing solar company means giving up a big share of the profits of going solar, and it may mean more expensive solar for society. So it’s good news that there are new options for making solar ownership as simple as a solar lease.
Solar leasing exploded in 2011, doubling to 46 percent of residential solar installations in California, then rising to nearly three-quarters in 2012 (with similar results in other states where 3rd party ownership is allowed). It’s no surprise.
Ownership of solar either requires a fair amount of cash ($10,000 or more) or financing. Financing for solar installations is easy, since many banks discovered benefits of going solar. Financing is easier by considering the 30 percent federal tax credit and state or utility incentives like rebates.
The Losses of Leasing
But while leasing is simpler than ownership, any car buyer can tell you that ownership tends to be a better deal than leasing. That’s why only 25 percent percent of new cars were leased in 2013. The same is true for solar: ownership means better financial rewards.
Over the first 15 years, the various options are fairly comparable, with a financed and owned system providing the best “net present value,” followed by leasing, and a cash purchase coming in last (due to the high upfront payment). But over time, the benefits of ownership (via cash purchase or financing) grow to outstrip the value of leasing. (scroll to the bottom for our assumptions)
As shown here, the EnergySage website offers a comparison of a solar cash purchase v. a solar loan v. a solar lease, as well, but doesn’t disclose their assumptions. For example, do their financing options include deducting the loan interest? Do the lease terms last 15 or 20 or 25 years? Can a homeowner buy the system after their lease expires?
Robert Borlick of Harvard’s Electricity Policy Group finds an even larger gap between ownership (via cash purchase) and leasing (you’ll have to forgive his ignorance on the value of solar). In his very specific example from Southern California, he finds that solar homeowners give up 80 percent of their project’s value over the first 10 years by opting for a lease.
The bigger societal problem for solar leasing is that leasing may save individual electricity customers money on their electric bill, but the high cost of the solar middleman means more expensive purchases solar electricity for other electric customers. This chart, from the Massachusetts Department of Energy Resources, suggests that the cost of making solar leasing work is far higher than having the site host own the system.
New Options for Ownership
Fortunately, several new options are available for owning solar that lower the risk and increase the reward.
Solar leasing has helped the residential solar market grow significantly, and it’s help solved a problem of poor policy that requires individuals wanting solar to become tax and finance experts. But in the years ahead, the expiration of federal tax incentives and simplified options for ownership (and its significantly better long-term value) will mean a surge back toward solar ownership.
Solar Cost Comparison Assumptions
- Solar array
- 5-kW solar array, $4/Watt installed cost
- 30 percent federal tax credit, no state/utility incentives
- 1300 kWh AC output per kW DC per year, degrading 0.5 percent per year
- $1000 inverter replacement in year 16 for all systems
- Solar loan
- 5 percent interest on $0 down loan, 20-year term
- Interest tax deductible at 25 percent marginal rate
- 15-year term
- $50 initial monthly payments, inflating at 3 percent
- Buyout in year 15 at 40 percent of original value
- Electricity and Present Value
- Initial retail price of 15 cents per kilowatt-hour, inflation at 3 percent per year
- Discount rate of 5 percent, accounting for inflation