What to Know Before Going Solar at Home to Save Money (and the Planet)

·13 min read

As extreme weather events become more commonplace, it's increasingly evident that a shift to solar-generated power and other clean and renewable energy resources will be important to help reduce carbon emissions and minimize climate change.

The good news is that most U.S. adults want to see that shift happen. Data from the Pew Research Center from 2019 shows that most U.S. adults prioritize developing alternative energy sources for the country such as solar or wind power (77%) rather than increasing U.S. exploration and production of fossil fuels (22%).

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Although many support a significant transition in how we generate power in the U.S., we still have a long way to go to reach clean energy goals. The same Pew report shows that just 6% of U.S. homeowners have already installed solar panels at home. However, another 46% say they've given serious thought to adding solar to their home in the past year—and that figure represents a slight increase over the 40% who were considering solar back in 2016.

If you're contemplating making the switch, keep this critical point in mind: The method you choose to finance your solar system will have different long-term outcomes. You'll want to do your research thoroughly and understand the vast and costly difference between leasing solar panels and buying them outright.

As a naive first-time homeowner, I was eager to go solar. I did so without conducting much research and opted to sign on to a leasing program that allowed me to install solar panels on my home without using any of my own money up front—and without going into debt via a big loan to purchase the panels. The company installed the system without charging me a dime. "Free installation? Bring it on," I thought as a single-income homeowner with a new, very large monthly mortgage payment. This approach allowed me to go green without taking on any more monthly debt payments. Great, right? Wrong.

I jumped on board without asking enough questions and (to my detriment) without carefully reading the fine print of the contract. It was the single worst money decision I made as a new homeowner—and one I continue to regret.

With my mistake in mind, I set out to help educate other homeowners. Here are the pros and cons of leasing versus buying solar panels—and what else to keep in mind as you contemplate making the transition to a cleaner energy source for your home.

What is solar panel leasing?

As the Choose Energy website explains, a solar lease is a financing option for residential solar panels. This approach allows homeowners to essentially rent a system from a solar company. As part of the lease, the consumer signs a contract with the solar company that lasts anywhere from 15 to 20 years; during that time, you pay a monthly fee to the solar provider, which is usually slightly cheaper than the monthly cost you're paying your utility provider. There's typically no down payment required to have the solar panels installed, and as an added bonus, the solar company covers all maintenance of the panels.

Those who opt for a lease (and keep this in mind, because it is a nuance that matters), will also continue to pay their local utility company in order to remain connected to the grid. You'll also pay for any amount of energy your home uses each month that's not covered by what your solar system generated. So, you'll be paying two bills instead of one. If all goes well, you won't use more energy than your solar system generates, because don't forget: The solar company will build a discount into the monthly lease prices it charges you from what you were historically paying the local utility provider, which should help cover any increased energy usage.

Theoretically, the two bills combined should be less than what you're currently paying your local utility provider. But that isn't always the case. If there's an excessively hot summer as climate change continues to worsen, or some other factor changes in your household and you find yourself using more energy, or you simply don't use energy conservatively enough on occasion, you will now be paying the cost of your monthly solar lease and another bill for excess energy costs to your local electricity provider.

The solar leasing model was made popular years ago by Solar City, a company that has since been absorbed by Tesla. When first created, leasing made sense in many ways because it made solar accessible to more people.

"This model was started during a time when the cost per solar panel, per watt, was so expensive that it didn't allow the common person to buy solar panels," explains Ben Colbert, founder of City Renewables, a solar panel installation start-up in Washington, D.C. "The leasing approach opened the market to anyone who wanted to go solar, which was a really good deal back then. But now the price has dropped dramatically...consumers can get the same solar system for a fraction of the cost."

In other words: The cost to buy a residential solar system is no longer so exorbitant that the only practical way to afford it is by leasing from a large provider that can afford to shoulder the financial burden. These days, an individual homeowner can very reasonably take a personal loan and buy the system outright. There are several reasons why such an approach might serve you far better in the long run when it comes to your household budget and protecting your assets.

How does leasing solar panels differ from buying?

There's a variety of financial benefits when buying your solar system, through either a cash purchase or a solar energy/personal loan. These are benefits you will not have access to when you opt for a lease.

Tax Benefits

Let's start with the tax benefits. When a homeowner signs on to a lease, you give away all the tax benefits of going solar. For instance, as Energy Sage explains, the federal government offers the investment tax credit (ITC), also known as the federal solar tax credit, which allows for deducting 26% of the cost of installing a solar energy system from your federal taxes. As long as you own your solar energy system, you're eligible for the solar investment tax credit. Lessees, on the other hand, won't qualify for this tax incentive.

"When you lease solar panels, you don't own the equipment; the leasing company does. So, you don't get tax credits; they do. You don't get the depreciation; they do," says Jake Hassid, COO of Simply Solar. "And within a few years, the money the company spent installing solar panels for you has been made back—but they continue getting money from you. That's how they make their profits."

As Energy Sage explains, some states are now following suit and offering tax credits for installing a solar panel system. This is on top of the federal tax credits. In other words, homeowners can deduct a portion of the cost of the solar panel system from their state tax bill as well, similar to the federal ITC. But once again, those who lease are out of luck.

Solar Energy Credits

The tax credits are not the only financial benefit worth noting. Here's perhaps the single biggest financial loss associated with leasing solar panels versus buying them: solar energy credits.

Some states now require local utility companies to generate a percentage of their electricity via solar panels. Those who live in such states and who have a solar system on their home will generate what's known as solar renewable energy credits for the amount of electricity produced by your solar system. And the local utility will count the solar power your system is generating toward the percentage of solar power generation they're required by law to meet.

And here's the best part: The utility company will pay you for the solar energy renewable credits you're generating. They will buy these credits from you, which can amount to you receiving hundreds, or even thousands, of dollars per year in income. You will make passive income from your solar panels. By leasing, you've just given up all of that valuable income.

"It goes without saying that solar energy is the way of the future. It's clean, efficient, and when done right, can save you a lot of money in the long run," says Peter Keohane, a solar and renewable energy expert and owner of JKS Electrical Solutions. "Yes, it may be more expensive to buy your panels outright, but in the long run, your panels will work for you and eventually pay for themselves; in some instances, you may even wind up making a profit."

What is the impact of solar panels on your home's resale value?

Setting aside the loss of the tax credits for a moment, it's important to understand that leasing solar panels also has the potential to diminish the resale value of your home by making it harder to sell.

"The impact of selling a house with leased solar panels is an issue. Either the homeowner will have to pay off the lease or the buyer must assume the lease, which in some cases might change the buyer's ability to qualify for the home purchase," says Anne-Marie Wurzel, a Florida-based real estate agent with Mainframe Real Estate. "If someone is tight on their margins with their debt-to-income ratio, assuming a solar panel payment might be like purchasing a car right before qualifying for a mortgage or incurring a $30,000 to $40,000 in credit card debt. It could affect their ability to qualify for a new debt, like a home mortgage."

In some instances, a solar panel lease allows the homeowner to pay off the remainder of the lease in advance, freeing you from the contract so that you can sell your home without the solar panels being an issue. But taking this route can be costly.

Mark Meyerdirk of Washington D.C.-based Urban Brokers has run into challenges in the past with a client selling a home that had leased solar panels. His client would have had to pay $12,000 to $15,000 to have panels removed. The alternative was to leave the lease in place and hope potential buyers would not object, which is not always the case.

"Why would buyers want to take on a solar lease agreement? As solar panel technology is advancing quickly, more efficient panels are available and costs are going down. This means that the lease terms may be antiquated and no longer attractive when compared to current offerings," says Meyerdirk.

An added concern: Some solar leasing companies will put a lien on your property, which can make it more difficult for you to refinance, says Meyerdirk. But in the case of his client, a prospective buyer came along who was willing to take on the solar lease arrangement without issue.

What to Know About Buying Solar Panels

The cost to buy solar panels has come down dramatically over the years. The average cost to install solar panels in the United States is about $12,000 after federal tax incentives, according to the website Consumer Affairs. This makes taking out a solar energy loan or personal loan one of the most cost-effective ways to go solar today.

"For most solar systems, you can get a loan for which the monthly payments are lower than your current electric bill," says Colbert. "So, for instance, say your electric bill is $200 a month, you can finance solar panels with a loan for $200 a month."

Depending on the initial cost of the system, or the size of the loan, your panels could be paid off in just five to 10 years. At that point, the energy you are generating is essentially free. You could also choose to purchase the panels with cash.

And remember: By taking either the cash or solar loan approach, you will qualify for state and federal tax credits and might even begin earning money from your solar system if you are in a state with solar energy credits.

"In Washington D.C., where I'm located, there are solar renewable energy credits, which means the local utility could pay you $200, $300, $400 per month or more. But if you lease, the solar company gets that money," says Colbert.

As an added consideration, buying solar panels does add value to your home. This is because you're providing a future homeowner with an energy system that doesn't come with a monthly payment.

Who could benefit from leasing solar panels?

Although the financial benefits of buying your solar system outnumber those of leasing, there might be instances when a lease is a reasonable choice.

For instance, if you're not able to benefit from the tax credits, perhaps because you're a diplomat, says Colbert. Leasing might also make sense if you don't have a credit score that will help you qualify for the most competitive interest rates on personal loans. It can also be a good choice for people who just don't have the cash to buy a system.

As Choose Energy notes: "For homeowners who can't manage the upfront costs of a cash payment, don't qualify for a loan, or can't use the tax credits," then leasing can make solar possible. But leasing is best left as a last resort; owning the system produces the highest savings in the long run.

Bottom line

For many, taking out a solar loan or paying upfront with cash will be the wiser choice when seeking to shift to solar power, as this option allows for reaping all of the financial benefits of going solar.

In my case, I missed out on all of the tax credits and opportunities to earn income from my system (which would have been incredibly valuable for a single mother). And because I didn't listen carefully or pay attention to the fine print of my contract, I overlooked the 2.9% annual rate increases associated with my solar lease. This means it will likely cost me more money for power than had I simply stayed with my local utility provider. By year 23 of my 25-year contract, for instance, my monthly bill, which started at $80, will increase to $146.97, and by year 24, it will be a whopping $151.

I could try to buy out my lease in order to free myself from the annual rate increases, but that would be an expensive proposition. I'm eligible to buy out my contract in year five of my 25-year agreement for a steep $18,300 to $18,400, a customer service representative recently told me. But even after buying out a lease, the homeowner is still not eligible for either the state or federal tax credits or the solar energy credit payments from the local utility (which seems a bit unfair and warrants change from government leaders given that it's the homeowner at that point and not the provider who owns the system and is generating solar energy.)

Given all of these issues, however, I might just have to live with the lesson I've learned here: Always read the fine print and do your research thoroughly before signing on any dotted lines. (Because free is never truly free.) I can take some comfort in the knowledge that I'm still doing the right thing for the planet—even if I'm paying a premium to do so.

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