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Considering Solar? Understand Your Options

Introduction

As with most other durable good or big-ticket purchases, paying cash for a solar electric system is generally the most cost-effective way to obtain the system. However, many homeowners and other types of property owners considering a solar investment cannot, or prefer not to, pay cash. Additionally, the owner of the solar electric system must bear the performance and regulatory risks to investment payback.

Below is a brief explanation of the three most popular ways for homeowners and other types of property owners to obtain a solar system. When making any major purchase or investment decision, we recommend that you solicit different options and attempt to compare the advantages and disadvantages of at least three offers. In the description below, we interchange the use of "homeowner", "property owner" and "site host", since many of the considerations apply both to residential and commercial/industrial properties that potentially become host to a solar electric system.

Make sure your home or building is as energy efficient as possible before installing solar. Benefits include: improved comfort and safety, lower energy bills, less renewable capacity needed, and lower upfront cost to install renewable energy

Much of the information found in this section is attributable to the following resources: Consumer Reports, Clean Energy States Alliance (CESA) under the U.S. Department of Energy Sun Shot Initiative "A Homeowner's Guide to Solar Financing - Questions to Ask" and "Solar Information for Customers"; Solar Energy Industry Association (SEIA) "Residential Consumer Guide to Solar Power." Links to these documents can be found below.

Three Popular Solar Financing Options

1) Solar Loan

A solar loan allow a homeowner to borrow money from a lender or solar developer for the purchase and installation of a solar system. The homeowner owns the solar system, possibly subject to a lien or security interest held by the lender. Lenders for solar loans can be banks, credit unions, state programs, utility companies, solar developers or other solar financing companies.

Advantages Disadvantages
Homeowner eligible to receive applicable federal and/or state tax and/or other incentives* Not all homeowners can obtain a loan
Homeowner eligible to receive Solar Renewable Energy Credits (SRECs),** which can be sold Homeowner responsible for relatively minor costs associated with maintenance and repair of system and possible minor increases in insurance costs
Homeowner owns the solar system and therefore has significant ability to manage it independently Poor performance or low SREC values may reduce homeowner's ability to repay
In most cases, lower overall cost  

2) Solar Lease

A lease allows a homeowner to enter a contract to make monthly, usually fixed but escalating, payments to a solar leasing company/developer in exchange for receiving the electricity produced by the solar system. The specific lease may or may not require the property owner to make an initial down payment at or before installation. Generally, the initial payment amount is often less than the utility charges for generating the same amount of electricity, but the lease payments generally escalate at a fixed rate, which could result in the lease amounts being higher than the utility charges depending on the rate of increases with the utility bills. A typical lease term is 15 to 25 years. The solar leasing company/developer pays for and/or performs the procurement and installation of the system, repairs and maintains the system, and owns the system located on the property. The leasing company generally also owns the SRECs produced by, and the tax incentives related to, the system. There are many variations on the terms and conditions of solar leases and the proposed contracts of each offer should be fully compared.

Advantages Disadvantages
Little or no upfront cost to homeowner, ownership at the end of the lease term may accrue to the site host Most leases restrict some property owner activities, for example, new construction that may cast shade on the system, roof replacement, property sale, etc.
Leasing company usually responsible for maintenance and repair of system (most systems require little of either) Tax incentives may not accrue to the site host

3) Power Purchase Agreement (PPA)

PPAs are relatively similar to leases. With a solar PPA, a solar developer buys, installs and maintains the solar system on the owner's property. The property owner purchases the energy generated by the system on a per kilowatt-hour (kWh) basis through a long-term contract with the developer. Generally, the initial rate (cents/kWh) is often less than the utility's rate for generating the same amount of electricity, but the PPA rate generally escalates at a fixed annual percentage, which could result in the PPA rate being higher than the utility rate depending on the rate of increases with the utility charges. The developer generally owns the SREC's produced by, and the tax incentives related to, the system.

Advantages Disadvantages
Similar to lease Similar to lease

What happens if I sell my home? Can I transfer my solar lease or PPA to the new owner for the remainder of the contract?

PPAs and Leases have a variety of different provisions that may apply in the case of the transfer of site host ownership. Some of the provisions can lead to additional expenses and/or complex discussions with a potential new owner, with the complexities driven in part by the difficulty inherent in valuing a long-term agreement. Although the provisions differ from agreement to agreement, in general they tend to provide the customer with the options of:

  • Transferring the lease or PPA agreement to the new homeowner if the new homeowner agrees to the transfer and passes a credit check.
  • Moving the system to the customer's new home, at the customer's expense.
  • Purchasing the system or pre-paying the remaining lease or PPA payments at significant cost.

Please make sure that you fully understand the terms of the contract agreement that is applicable if you sell your home.

For additional information comparing key provisions in typical Solar Leases, Solar Loans or Power Purchase Agreements:

Clean Energy States Alliance - A Homeowner's Guide to Solar Financing - Questions to Ask

Standardized templates for solar leases and PPAs have been developed by The Solar Access to Public Capital Working Group, convened by the U.S. Department of Energy's National Renewable Energy Laboratory, as well as SEIA, the solar industry's trade association. You may want to compare any lease or PPA you are offered to these templates.

The following table is based on information found in CESA "A Homeowner's Guide to Solar Financing: Leases, Loans and PPAs"

Questions Solar Lease PPA Solar Loan
Who buys the system? Third-party developer Third-party developer Homeowner
Who owns the system? Third-party developer Third-party developer Homeowner
** Who owns the SRECs? Third-party developer Third-party developer Homeowner
*Who takes advantage of federal and State tax incentives? Third-party developer Third-party developer Homeowner
Who is responsible for the operation and maintenance of the solar equipment? Typically, third-party developer Third-party developer Homeowner-Solar equipment should have manufacturer warranty for at least five years from the date of installation
Who is responsible for damage or destruction to the solar system? Third-party developer Third-party developer Homeowner
What happens if the homeowner sells the home where the solar system is located? This should be defined in the contract agreement This should be defined in the contract agreement Homeowner owns the system and can leave the system in place or relocate the system to new home

 

*The most significant state or tax incentives currently available are the federal tax credit for 30% of the cost of the system and the ability to sell SRECs (as described below). In addition, by law, New Jersey requires utilities to allow for net metering, whereby they must buy any excess electricity generated by your solar system.

**Solar Renewable Energy Certificate (SREC) - Each time a solar system generates 1,000 kilowatt-hours (kWh) of electricity, an SREC is earned. Solar system owners report the energy production to the SREC Tracking System. This reporting allows SRECs to be placed in the system owner's electronic account. SRECs can then be sold on the SREC Tracking System, providing revenue for the first 15 years of the system's life.

 

 

 



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