The Solar Lease vs. Buy Debate; A Question of Math

In an earlier blog, Financing Your Renewable Energy System, we made the statement, “The lure of no money down for leasing is tempting, but the economics show that owning your system offers much better payback over the life of the system.” We want to take some time to explain why.

Currently, over 60% of residential solar installs are third-party ownership, either a lease or a Power Purchase Agreement (PPA). The difference between the two is the structure of the deal. A PPA has the homeowner pay an agreed upon price per kWh that the solar system generates, generally a little less than what they are currently paying for electricity from the grid. A lease is a set price per month, so you’ll be paying more per kWh in the winter when the system isn’t generating as much power, but less per kWh in the season when it is producing its most, usually summer. A lease almost always has an escalating cost, usually between 2.9 – 3.5% a year, so your monthly cost goes up each year. This is based on the assumption that the electric grid cost will also go up each year, but faster than the lease.

With either option, the company who you buy your solar power from owns the system, not you, and therefore gets all of the tax credits, rebates, SRECs, and any other incentives. If you pay Federal taxes, that’s 30% of the installation cost that you could have received, but instead goes to the third-party. If you are in a state that also offers other incentives, you will not qualify for any of them.

Now let’s look at the cost of ownership instead. As the owner of the solar system, you get all of the financial incentives, reducing the install cost by 30% to 50% or more. There are an increasing number of financing options available, as discussed in our previous blog. Let’s compare the cost of a lease with an escalating monthly cost versus owning a system; both with financing and with upfront payment in full. But first, take a look at the historical cost of electricity and its projection for next year, from a report by the US Energy Information Administration (eia). The US average has been a fairly steady increase of 3% to 4% a year over the past 15 years, while New England has seen some fairly dramatic ups and downs.

Retail Price of Electricity in Residential Sector, U.S. AverageRetail Price of Electricity in Residential Sector, New England

The following charts show the 20 and 30 year lifetime costs and savings of having a 5,000W solar system, in an “average US location”, not the deep south or far north, with an estimated 500kWh output a month. We used $0.16 per kWh for grid power, and a 4% annual increase. We also assumed needing a new $2,000 inverter on year 15. The leased system was for a 20 year lease, with a 2.9% increase each year, the leasing company replacing the inverter, and removing the whole system at the end of the 20 year lease, and therefore buying their electricity from the grid for years 21 – 30. The purchased solar system cost the homeowner $3.50 a watt to have professionally installed, and they qualified for a 25% local incentive, and the 30% federal tax rebate. We did not include the incentive money in the financing calculations, as many solar loans will lend you that money at no interest short term until you get your tax refund and pay it back.

Annual Solar CostsAnnual Solar Savings

20 and 30 Year Solar Costs20 and 30 Year Solar Savings

These numbers change if we remove the 30% federal tax credit, as discussed in our earlier blog, Solar Investment Tax Credit (ITC): Tick Tock, Time’s Running Out. As you can see in the next graphs, if we only have the local incentive, while still in the positive numbers, the savings of the financed system aren’t as good over 20 years, but do make a big improvement in years 20 – 30, after the loan is payed off. Note that since leasing companies also count on the 30% tax credit, new leasing deals set up in the future without the tax credit may also be changed to make up for that lost income.

20 and 30 Year Solar Costs & Savings – No Incentive:

20 and 30 Year Solar Costs and Savings

Buying a solar system with an expected life of at least 30 years can be a bit of leap of faith, since solar is still fairly new, you can’t just look at how systems have performed over the past 30 years. PVOutput is an online service that enables solar owners to share their system’s performance numbers. Here’s an example of a system in southern California that has been up and running since the end of 2005. The year 2005 is for a partial year, but you can see that from 2006 to 2013, they have seen less than 2.5% loss in production (2014 only reported 340 days). This is using technology from ten years ago, which is encouraging knowing your system is designed to last for decades.

PV Solar System OutputPV Solar Output

With the rising cost of electricity, the ability to purchase your system now and see as much as thousands of dollars of savings a year, accumulated over 30 years, adding up to tens of thousands of dollars over the life of your system, it’s easy to see why owning your solar electric system is a great investment for now and decades to come.

Appendix A: Other USA regions’ electric price history

Retail Price of Electricity in Residential Sector, Middle AtlanticRetail Price of Electricity in Residential Sector, South AtlanticRetail Price of Electricity in Residential Sector, MountainRetail Price of Electricity in Residential Sector, Pacific Contiguous

About Author

Amy Beaudet
Amy Beaudet was in the solar industry at the altE Store from 2007 until her untimely passing in 2021. She was a sales rep, instructor, and an all-around solar evangelist, sharing her passion for solar around the world. When whe wasn't at work, she enjoyed sailing and skiing - but odds were good she was still talking about solar on the boat or on the slopes. See more of Amy Beaudet's blog posts.