Cash vs Loan vs Lease vs PPA

Overview

Going solar comes with several options: cash, loan, lease, or PPA. Cash, of course, means the property owner pays for the entire system and installation out-of-pocket. When it comes to financing a project, there are multiple lenders offering solar-specific loans. Then there are also lease and PPA options where the installer owns the equipment, installs usually at no upfront cost, and offers the property owner a cheaper payment plan compared to the existing average utility bill. Determining which option is the most advantageous can seem a bit overwhelming, especially when certain companies do not offer all options, while some installers do in fact offer all options.

Cash

When we compare system cost versus the utility bill payments over 25 years, you’ll find tens of thousands of dollars in savings by going solar. Of course purchasing with cash can offer the greatest savings over the lifetime of the system. Payback period for systems can be as soon as 5 years (if the 30% tax credit is applied) or 7 years (if the 30% tax credit is not applied). Obviously this payback period is dependent upon the system cost (which can vary greatly depending on which installer you contract with).

Loan

Like cash, with a solar loan, the property owner is financing the system to own the system and take advantage of the federal tax credit (ITC). Solar-specific financing options have surfaced in recent years, and include certain variables to consider: 1) interest rates, 2) term lengths, 3) dealer fees. Interest rates are all over the place, especially with federal interest rates increasing. Some options are as low as 0% while others can be as high as 36%. Typically all of these options include no pre-payment penalties, and term lengths range 8-25 years. What’s the catch? DEALER FEES. While a lender might offer a 0% interest rate for 8.5 years, it likely includes a 30% or higher dealer fee. Dealer fees are a percentage based on the total installation cost. Let’s do easy math: if a system was quoted at $30,000 and the dealer fee is 30% ($9,000), then the system would cost $39,000 with financing in this example. The 30% federal tax credit (ITC) would be $9,000 bringing the system cost down to $30,000. This makes your monthly payments around $294. 

What matters are the numbers over 25 years, when is the return on investment (ROI)? The ROI is typically 8-12 years, which is met in this example. How much money will the property owner save over 25 years compared to paying their regular utility bill and subject to increasing rates? The answer depends on 1) system performance and 2) the utility rates, ultimately adding up to tens of thousands of dollars in savings. Solar systems obtained by loans have more savings for the property owner over 25 years compared to leases and PPAs. 

Property owners might find better financing options with their existing bank. Our biggest question, is it more advantageous for a lease or PPA than all this hassle? Efficiency of solar panels typically degrades by about 0.25-0.5% per year. Meaning by year 25, the solar panels should produce 85%-92% of original efficiency depending on which panels are used. Equipment manufacturers typically include a 25 year warranty, which also means the warranties have expired thereafter. Certain manufacturers offer a 30 year warranty, and Solar Insure offers up to 30 years as well (insurance on labor and parts if the installer or equipment provider goes out of business). Either way, after this period of time, if the system has issues, then the property owner will have to foot the bill.

Lease

With leases, the installer owns the equipment and gets the federal tax credit (ITC), while the homeowner leases the equipment and immediately begins saving money compared to their average utility bill throughout the 25 year plan. What if the property owner is planning to sell the house before 25 years? Several leasing options include fair market value buyouts between 5-25 years. Otherwise the property owner can 1) include the buyout cost in the asking price of the property, or 2) the buyer can adopt the lease and pick up where the previous owner left off. Either option is not as daunting as it may seem on first impression. Typically applicants only need a 640 or higher credit score, and these systems are liens on the equipment – not the home. Leases are a great option as they also allow the property owner to move on to the latest and greatest technology 25 years down the road, as who knows what technology and programs might be possible then. As we mentioned under the Loan section above, after the equipment manufacturer’s 25-30 year warranty expires (and Solar Insure’s 30 year plan if applicable), the property owner is stuck with any parts and labor thereafter. Leases do not leave the property owner with a system that continues to perform, but has degraded over that time.

PPA

Power Purchase Agreement (PPA) solar systems are owned by the installer, and the property owner pays a set rate schedule for the power the system produces (at cheaper rates compared to utility rates). Just as with loans and leases, PPAs save property owners tens of thousands of dollars over 25 years. PPAs often include the option to 1) buy the system outright after a certain period (such as 5 years) and 2) have the system removed at no cost. PPA’s might be even more advantageous than financing, as some installers offer the same system pricing as if it were cash or finance, which means the PPA could be a great way to pay the system off over a longer period of time rather than assume the interest and dealer fees associated with financing.

What if you don’t plan on owning the property for 25 years? 

Being able to show several years worth of a working system adds value to a buyer, as they can see a clear savings. In other words, numbers don’t lie. Selling a home with a PPA might be an easier sell to a buyer, as usually all that’s needed is a 650+ credit score to take over the PPA. PPAs can also be more advantageous as there is no financial “debt” per se, as we’re simply following a contract where the property owner pays for the power their system produces at a cheaper rate compared to the utility rate, ultimately saving thousands of dollars over the lifetime of the system. Whereas after buying a system via cash or financing, in order to sell the property at a later time requires increasing the asking price for the property; such as a $500k home with a $30k solar system means the seller is asking for $530k or greater. 

A study by Rocket Homes found that 35.3% of homeowners purchased a house with solar, indicating a significant increase in demand compared to 9.7% of homebuyers who purchased their home prior to the year 2000. Who wouldn’t be interested in lowering their utility bill by taking money that would otherwise go to the utility company, and redirecting into a system that pays for itself and puts money back into the buyer’s pocket? This is why G Factor Solar’s tagline is “Solar Makes Sense”. It’s all a matter of choosing a system, installer, and warranties that make sense on an individual basis. Additionally, homes with solar typically see an increased property value of 4.1%. For example, a home valued at $530,000 could see an added 4.1% value of $21,730.

What if you need a larger system in the future?

Nowadays solar systems are fairly modular. Meaning systems can be enlarged rather easily, both physically and financially. There are plenty of real-world examples where property owners increase the size of their system down the road (such as with children growing up or buyers who inherited a system but need more offset). 

So which option is best for you?

The simple answer is it depends on a case by case basis. That’s where we come in. First, we will review your past 12 months of utility bills and figure out what system options make sense for your situation (cash vs loan vs lease vs PPA). This shouldn’t be rocket science, and the right sales rep will help you make sense of it. Educating the property owner and guiding them through the decision-making process is what it’s all about!

End Of Blog!

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