A 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; Zenernet currently does not use this model because we don’t think it provides compelling benefits to homeowners, as will be explained later.

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, Zenernet 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 Zenernet believe that the downsides of solar leases and PPAs outweigh the positives for most homeowners.

Ready to go in-depth?

Although the financial side of going solar may seem complex at first, it really comes down to analyzing short-term expenses against long-term ROI.. If you’d like to have a more detailed conversation about whether or not going solar makes financial sense for you, schedule a consultation with a Zenernet energy consultant – and be sure to follow us on social media for more going-solar-made-simple resources.

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