Solar financing: How do you pay for solar?
Last updated 1/13/2023
There’s a reason why 2.5 million homeowners–and counting–have already installed solar in the US: it’s a great investment! Solar panel systems last for 25 years or more, offsetting most or all of your electricity bill every month. Those monthly savings add up quickly: if you spend $150 per month on electricity today, you’ll spend over $65,000 on electricity in the next 25 years. By investing in solar, you can avoid most or all of that future spending on electricity.
Solar financing is the option for homeowners to instruments like loans and leases to come up with the funds needed to purchase a solar system by paying in installments over time instead of out-of-pocket upfront at the time of purchase.
|Electricity spending||10 year cost||15 year cost||20 year cost||25 year cost|
|$50 monthly bill||$6,900||$11,200||$16,100||$21,900|
|$100 monthly bill||$13,800||$22,300||$32,200||$43,800|
|$150 monthly bill||$20,600||$33,500||$48,400||$65,600|
|$200 monthly bill||$27,500||$44,600||$64,500||$87,500|
|$250 monthly bill||$34,400||$55,800||$80,600||$109,400|
But solar isn’t free - to get these levels of savings, you have to first pay for your solar panel system, with a typical solar panel system costs around $25,000 on EnergySage. Thankfully, there are a number of different ways to pay for your solar panel system, each with their own pros and cons.
Solar financing options
There are three primary ways to pay for solar: with a cash purchase, with a solar loan, or with a solar lease/power purchase agreement.
There are two ways to pay for a solar panel system that you own outright: an upfront, cash payment and a solar loan. A cash purchase of a solar panel system is the best way to maximize your savings from solar. Think of it this way: if your solar panel system is designed to produce 100% of your electricity needs, then if you purchase your solar energy system upfront you’ve just paid for 25 years’ worth of electricity. Pretty cool! You’re insulated from any future electricity rate increases and you’ll receive all of the financial incentives and rebates associated with going solar. Overall, this means you’re likely to see a better return on your investment from solar than if you were to put that money into the market.
At the same time, the one clear drawback of a cash purchase is that solar isn’t cheap. If you want to purchase your system in cash, you’ll need to have enough capital on hand to pay for the system, which can set you back $20,000 to $30,000.
The second main way to own a solar panel system is with a solar loan. Solar loans are a wonderful financing option because they allow you to go solar and own the system with no money down, and often at a lower cost than what you pay for electricity at the moment. In other words, solar loans make it so that if you can afford your monthly electricity bill, you can afford to put solar on your roof. Not too shabby!
Solar loans may seem similar to a solar lease or PPA, but there’s one key difference which has two major implications: with a solar loan, you own the system, whereas with a solar lease/PPA, a third party owns the system. This means that with a solar loan, you’re now eligible to receive any rebates and incentives for the solar panel system, but you’ll also be responsible for any future maintenance.
Solar leases and PPAs
Though they’ve declined in popularity in recent years, solar leases and power purchase agreements (PPAs) played a huge role in the growth of the solar industry in its infancy. Solar leases and PPAs work very similarly, which is why they’re often lumped together: they are both a method of third party ownership (TPO), where that third party owner installs solar panels at your property and then sells you the electricity produced by the solar panels at a predetermined rate. There are subtle differences in how leases and PPAs work, but they’re similar enough that it’s easier to keep them together.
With a lease/PPA, you’ll typically lock in a set rate for electricity for the next 25 years, about 10 to 30 percent below the rate you currently pay for electricity. Historically, leases and PPAs built in an escalator to your payments, meaning that each year you would pay more for your solar than you did the year prior, but recently, the trend has been for leases/PPAs locked in at a specific rate for the entire contract period. What’s more, with a lease/PPA, the third party owner is responsible for monitoring the system and any maintenance on it, meaning there’s always somebody looking out for the well-being of your solar panel system.
Because you don’t own the solar panel system in a lease/PPA set up, you won’t be eligible to receive any of the financial incentives and rebates associated with solar; rather, the company that owns the system will be. Additionally, while homes with solar sell for 3-4 percent more than similar homes without solar, that’s not always the case with a lease/PPA, since you as the owner of your home aren’t technically the owner of the solar.
Note: third-party ownership isn’t available in every state. Here’s DSIRE’s map of states that allow for solar leases and PPAs.
The ways you can pay for a solar panel system are not that dissimilar from the ways you can pay for a car: an upfront payment, a loan, or a lease. But there’s one way of paying for a car that we haven’t covered from a solar financing perspective: renting a car.
Until 2019, it wasn’t possible to rent a solar panel system with a short-term contract. That all changed with Tesla’s launch of their subscription model, which allows you to actually rent the panels. For a set, monthly fee, they’ll install and maintain the system, and they’ll come remove the panels if you decide solar isn’t for you. To learn more about the Tesla subscription program, here’s our overview of the program, and here’s our comparison of renting panels to other financing options.
Tax benefits and rebates for solar panels
There are many rebates and incentives available as well to help homeowners pay for solar panels. The strongest of these is the federal solar tax credit which allows people to deduct 30 percent of the cost of installing a solar panel system from your federal income tax. The tax will stay at 30 percent until 2033, after which it will drop to 26 percent. There is no cap on the value of the eligible system.
Depending on where you live, there also may be different local and state-level incentives available. The friendliest states for solar tax incentives are: New York, Rhode Island, Iowa, Connecticut, and Maryland. You can read more about these local incentives here.
Cash vs. Loan vs. Lease comparison for solar
A cash purchase is right for you if:
- You’re looking to maximize your savings from solar;
- You have enough tax liability to take advantage of the solar investment tax credit (ITC);
- Or you have the funds available to pay for a solar panel system upfront.
A solar loan is right for you if:
- You don’t want to shell out the amount of cash required to pay for a solar panel system upfront;
- But you still want the most savings on your electricity bills as possible;
- And you would like to be eligible for all incentives and rebates.
A solar lease/PPA is right for you if:
- You would prefer someone else to monitor and maintain the system;
- You aren’t eligible for tax incentives;
- Or you’d just like to reduce and/or lock-in your monthly electricity bill.
Compare your financing options on EnergySage
The easiest way to compare the pros and cons of different financing options is to drop your address into the free-to-use EnergySage Solar Calculator: we run the numbers for you to see how much you can save with a cash purchase, solar loan, and a lease/PPA (if it’s available where you live). To see these differences in action, sign up for a free account on EnergySage to receive custom solar quotes from local solar companies with different financing options included.
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