A Complete Guide to Solar Financial Models

Cash purchase, loan, or lease? Here’s the bottom line on different ways of going solar

Going solar is a major financial decision – but there’s no reason it needs to be an intimidating one. The fundamentals of going solar are no different than any other major purchase.

From a financial standpoint, going solar, like many other home improvements, is best thought of as an investment. There are certainly other reasons to go solar besides the financial returns – peace of mind if you live in an area with frequent utility outages, or doing something positive for the environment, just to name a couple.

For most homeowners, however, It’s the prospect of saving money on electricity bills and being protected from rising utility costs that makes residential solar attractive. This means that when considering which financial model for going solar makes sense for you, you should think about how the choice affects your return on investment. You spend less overall by making a cash purchase, but financing options make going solar more approachable for many homeowners. Some solar providers also offer solar leases.

Cash Purchases

Going solar through a cash purchase offers the greatest return on your solar investment over the long term. By paying the cost of your system up front, you avoid paying interest and start reaping the financial benefits of offsetting your utility bills sooner. Depending on the state where you live, the value generated by your solar system typically pays off the cost of purchase in five to 10 years. After this break-even point, you get to reap the benefits of going solar for as long as the system continues to operate – and although most residential systems are warrantied for a 25 year lifespan, in reality, it can be much longer.

Purchasing your solar system also allows you to take full advantage of federal and state solar incentives. The Federal Solar Investment Tax Credit (ITC) is the most valuable such program – homeowners who go solar in 2022 can be eligible for a tax credit worth 26% of the cost of the system. In effect, the ITC offers homeowners a substantial discount on solar installation.

Finally, purchasing your solar system also adds value to your home – roughly 4% on average, according to recent studies. This can equate to thousands or even tens of thousands of dollars when the home is sold. Most solar-friendly states also have laws on the books which exempt the value added by a solar system from being considered in property tax valuations, so you won’t pay more in taxes by going solar.

Simply put, if you can afford it, Forme Solar recommends going solar through a cash purchase because it offers the biggest possible payoff for your solar investment.

Financed Purchases

The advantage of a financed purchase, just as in the case of financing the purchase of a car or a home itself, is that it allows buyers who don’t have the financial resources to make the upfront lump sum payments of a cash purchase to access the benefits of greater energy independence. Depending on the loan term, many homeowners can reduce their energy payments right away. Other homeowners prefer to opt for shorter loan terms with higher monthly payments, with the understanding that at the end of the term, they will own the energy generated by their system with no further payments.

Purchasing your solar system through a financed loan still offers the same benefits of ownership that come with a cash purchase. The primary downside of a financed purchase, just as with using a loan to buy a car or your home itself, is that the price is higher overall compared to paying cash. This means that a solar loan sacrifices a portion of the long-term solar ROI.

In short, a financed purchase is the next best thing to a cash purchase, sacrificing a bit of ROI to secure the same long-term benefits without the up-front payment.

Solar Leases and PPAs

Leasing a solar system is another option for homeowners who can’t or simply don’t want to bear the short-term financial burden of making a cash purchase. The appeal of a solar lease is that you can start enjoying the benefits of going solar, like lower utility bills with little or no money down. Some solar providers base their entire business model on leases, and strongly push homeowners toward this option.

By leasing your solar system, you lose the benefits of ownership, and your savings over the life of the lease will be lower – a reduction in your ROI. Homeowners who lease a solar system also are typically required to give up incentive claims to the third party that owns the system. In theory, those benefits are passed back to the homeowner in a lower lease price, but the full incentive value is rarely realized by the homeowner.

Most solar leases come with 10, 15, or 20 year terms, and not all include an option to buy at the end of the contract term. This creates complications when the lease expires: typically you will have to choose between renewing the lease contract, upgrading to a new system under a new contract, or having the system removed from your home.

Complications also arise if you decide to move during the lease contract. A solar lease makes a real estate transaction more complex, potentially driving away some prospective buyers. If the buyers aren’t interested in picking up the lease and payments, then you will have to investigate your options for moving the system to your new home or paying to remove the system and break the lease.

You may also sometimes hear about Power Purchase Agreements, or PPAs. A PPA is similar to a lease in most respects except that instead of leasing the solar hardware installed on your home, you enter an agreement to purchase the power generated by the system. In practice, a PPA has most of the same disadvantages as a conventional lease.
We at Forme Solar believe that the downsides of solar leases and PPAs outweigh the positives for most homeowners.

Major Difference Between Leasing or Buying Solar Panels

The primary difference between buying or leasing a solar PV system is around ownership. Ownership is significant because you can take advantage of the federal tax credit, and an increase in equity to your home. A lease allows you to take advantage of immediate savings with $0 upfront costs. You also don’t have to worry about the hassles that can come with owning a system since someone else is guaranteeing that your panels are running efficiently.

Therefore, the primary question comes down to, are you looking to maximize your ROI (return on investment), or would an additional $30/mo in your pocket make a difference? If you’re looking to maximize your ROI, owning the system is the way to go. It now depends on whether you want to purchase it outright or purchase it through financing. If you are looking to capture immediate savings, getting a PPA / Lease allows you to pay $0 down and immediately start saving 30 – 50% per month on your electricity bill.

Quick Tip: If you buy a solar energy system, either outright or after repaying your solar loan, the most crucial difference is that you own the solar energy system. If you lease the solar energy system or sign a power purchase agreement (PPA), a third party owns the solar panel system.

Benefits of Both Owning and Leasing

Just like with a car, the choice between buying and leasing is a tough call, but in both scenarios, you will save money. By adding a solar energy system to your home or commercial building, you can:

Consume the power you generate at a significantly lower cost per watt.
Earn utility company credits for sending unused electricity back to the grid
Reduce your use of fossil-fuel-based electricity and prevent tons of carbon from entering our planet’s atmosphere each year

Specific Benefits of Owning

Quick Tip: For those looking to maximize their ROI

By owning your solar energy system, you will maximize the financial benefits of installing a solar panel system. There is no better way to leverage additional capital than to invest it in the purchase of a solar energy system.

Increase the market value of your home or commercial property by installing a solar panel system.
Be eligible to reduce your federal and state tax liability through the federal investment tax credit.

Quick Tip: (Commercial Property Owners) Could potentially further maximize their ROI by taking advantage of tax benefits by categorizing the solar panel system as a depreciable asset. We recommend that they always check with their professional tax consultant first to ensure they qualify and that it matches their goals.

Specific Cons to Owning
High Upfront Cost Investment
5-7 Year breakeven for a purchase
Must own long enough to see the savings

Specific Benefits of Leasing

Quick Tip: For those looking for immediate savings with no upfront costs.

Go solar with nothing out-of-pocket, typically $0 down!
See immediate savings by reducing your electricity costs by 30% – 50%
PPA and most leases are guaranteed to be fully transferrable
Only a 2.9% annual increase in electricity costs vs. 4-6% from your utility company

Specific Cons of Leasing

Can’t buy the system until after you’ve been leasing for 5 years or more
No tax credit benefits – already baked into the savings

Major Difference Between Leasing or Buying Solar Panels

Solar Buy vs. Lease Comparison

	Buying	Leasing
Ownership	You own the solar PV system and get to keep it as long as you want.	You don’t own the solar PV system. You get to take advantage of the benefits but must either return it or purchase it at the end of your lease.
Up-Front Costs	Typically a $1,000 initial deposit as a down payment.	Typically a $1,000 initial deposit as a down payment.
Monthly Payments	Loan payments are typically higher than lease payments since you’re paying off the entire purchase of the solar energy system plus interest and other finance charges.	Lease monthly payments are almost always lower than loan payments. It should also be a lower monthly payment to pay for your electricity than from your utility company.
Future Value	The solar PV system will depreciate, but its cash value is yours to use as you’d like, and it will increase the equity of your home by an average of 34%.	The future value doesn’t affect you financially, but you also don’t get any benefits around improve home equity or a federal and state tax credit.
Early Termination (e.g. moving)	You own it. You can sell or get rid of your system at any time.	Typically 100% transferrable. After 5 years of leasing, you typically have the option to purchase the system if you’d like.
End-of-Term	N/A	Most leases are 100% transferrable.
Adding a Solar Battery System	You can add a solar battery system at any time.	It depends on the leasing company, whether they will allow for a solar battery storage system to be added in the future.
Performance Maintenance	The homeowner should do periodic checks to ensure that their system is performing.	With leases, the performance of the system is monitored and guaranteed by the leasing company.

Deciding Whether to Lease or Buy

If you are looking to increase the equity in your home, get the best return on investment, and take advantage of the income tax credit, a solar purchase may be the perfect option for you, even if you have a credit score under 650 and have access to capital. Not only will it increase the value of your home or business, but it also won't increase your property taxes.

However, if you are looking for a way to reduce your electricity costs and start saving immediately without having to worry about the maintenance and repairs of your solar panel system, a solar lease or Power Purchase Agreement (PPA) may be the perfect solution for you. With zero out of pocket, you can reduce your electricity costs by 30-50% and create a predictable, lower electric bill. Additionally, if you are not eligible for the Solar Investment Tax Credit (ITC) benefits, a solar lease or PPA allows you to still benefit from solar energy without the added financial burden.

Buying vs. Leasing Pre & Post Solar Installation Differences

As you go through the solar installation process, there are a few differences that you will experience whether or not you decide to buy or lease. It can impact everything from the overall cost of going solar to the maintenance of the system after your solar energy system is operational.

Lease vs. Own: Before Solar Installation Differences

Solar Purchase (Own)

For Purchases using Cash

Provides a $1,000 deposit to the installer
80% of the balance is due on the day of the installation
100% balance payment is required before PTO (Permission To Operate)

For Purchases using a Loan

Customer applies for a credit check if they are getting a loan
Receive approval from the loan company for the amount

For Solar Leases & PPAs

Customer applies for a credit check
Receives approval from the solar company to purchase electricity from them

Lease vs. Own: Post Solar Installation Differences

Solar Purchase (Own)

You own the solar energy system and are responsible for monitoring the performance and maintaining it.
Depending on your solar installer, your purchase may not include a customer portal or application to track your solar system’s performance.

Solar Lease/PPA (Lease)

The solar leasing company owns and maintains the solar power system. This means that they are also responsible for the underperformance of the system.
Most leasing companies provide a free customer portal or application that tracks the performance of your solar energy system.

Solar Purchase and Lease Terms

Solar Purchase (Own)

100% of the balance payment is required before PTO (Permission to Operate)

Solar Loan (Own)

Loans are generally available for 10 to 25-year terms
Interest rates range from 3% to 8%
Dealer fees are typically around 5-15%

Solar Lease/PPA (Lease)

Solar leases and PPAs are typically for 20 to 25-year terms
With a PPA, you have the option to purchase the system after the 5-year mark, at which point you can buy the system outright.

Deciding whether to own or lease your solar energy system

Going solar has never been easier, but one of the hardest questions to answer is deciding whether you want to own or lease your system. Every person’s situation is different, and what is best for your property depends on a wide range of factors. Forme Solar, is proud to be a beginner’s guide to going solar, and you can be assured that we can help you walk through the full range of factors that will determine whether or not owning or leasing the system makes the most sense for your home or commercial property.