May 2, 2012

Previous posts on this blog have dealt with financing energy retrofit projects. As a general rule, residential efficiency is cheaper to achieve than installing renewable energy systems. And it’s important to remember that saving energy is just as good as generating energy from renewable sources.

But, if you’ve already made energy efficient upgrades, you might consider looking at installing a solar array. There are several interesting financing options available, including solar leasing, power purchase agreements and loans. The following is a brief overview of each model and the pros and cons associated with each.

Solar Leasing

A solar lease is a contract whereby a homeowner (the lessee) rents a solar system--either a photovoltaic system or solar thermal unit--from a third party (the lessor). The lessor is responsible for installing the solar array and maintaining it over the duration of the lease period--typically 15 to 20 years.  In exchange for making the monthly lease payments, the homeowner/lessee gets all the clean, solar energy produced from the system.

The primary benefit of leasing is that it requires little or no money down.  This means you don’t have to prepay for solar energy that you’ll use 20 years down the road--not bad if you’re on a tight budget! Be aware, though, that some lease rates can increase between 2.5 to 4.5% per year (c.f. utility rates which typically increase about 5% annually).

However, there are a couple of drawbacks to the solar leasing model. First, the monthly fee is fixed, and not a function of the solar output of the array. If you have a cloudy month, snow on your roof, or an equipment malfunction, you could be paying for the equipment without getting any production. Thus, it’s important to choose a qualified leasing company with an equally qualified installation team.

Second, leasing is typically more expensive than buying a solar array outright, and often lease agreements have provisions for balloon payments or buyouts. The buyout price is determined by the fair market value of the equipment at the expiration of the lease period, not a predetermined number.

Other things to consider when entering into a solar lease are maintenance and downtime. Ensure that the lessor is obligated to repair/replace any equipment in a timely and professional manner. If not, see to it that you’ll be reimbursed for downtime.

Power Purchase Agreements

A PPA is a contract where a homeowner agrees to purchase all the solar energy produced from an array installed on his/her property (the host property), but the equipment is owned and operated by a third party (the solar services provider). Rather than making a monthly payment, the homeowner is obligated to purchase all the power produced at a certain price per kWh.

Much like a lease, the contract term for a PPA is usually between 15 and 20 years, requires little or no money down, and often a rate escalator of 2.5 to 3.5% per year applies if you don’t pre-purchase the energy. However, the terms, PPA rate, annual escalator, term length should be negotiable.

There are numerous benefits under the PPA financing model:

  • For climates with significant snow or clouds, a PPA makes more sense than a lease.  Since you only pay for energy produced, you don’t have to pay out of pocket if your array is covered in snow or blocked by clouds.

  • Energy purchased under a PPA is typically cheaper than that offered by a local utility, so you can live sustainably while saving money!
  • PPA’s are a great way to avoid the volatility of energy markets, because you’re purchasing energy at a set rate for an extended period of time.
  • You don’t have to pay for maintenance or deal with the system if it breaks.

A PPA may not make sense for everyone, though. If you can afford to purchase a solar system outright, or qualify for low-interest financing, you’ll pay less over the long haul than if you go with a lease or a PPA.

Purchasing, Financing & Incentives

If solar leasing and PPA’s don’t sound attractive, you can always do it the old fashioned way -- purchase the system and pay for its installation. A number of tax credits and local rebates soften the blow of the initial expenditure.  First and foremost, you can get a 30% federal tax credit until 2016.  Many states also offer rebates or performance-based incentives of up to several thousand dollars, which you can look up at

If you can’t swing the initial expense, you can obtain a number of low-interest loans from both federal agencies and private lending institutions. Solar projects can be financed through an Energy Efficient Mortgage (EEM) as well as through PACE loans in a few states.

There are two significant benefits under the purchasing model:

  • Once the system pays for itself in savings, you get free energy for the remainder of the equipment’s useful life (well, except for minimal maintenance); and
  • If your utility allows net metering, you can sell electricity back to the grid, or, at least, wipe out some of your utility bill each month.