Solar energy systems are a great investment for homeowners and businesses alike—but choosing the right financing option is key. In this post, we break down the various financing methods—leases, Power Purchase Agreements (PPAs), loans, and cash—by categorizing them into Third Party Ownership (TPO) and Ownership options. We’ll also explore some of the common challenges with TPO financing, such as maintenance and roof repairs, and explain why a lease buyout might be the best option for customers who lack the tax liability needed to leverage federal tax-based incentives.
We hear it all the time from unknowing customers — "But I don't want to have to maintain it" — check out our blog post to dispel the Maintenance Myth
Third Party Ownership vs. Ownership Options
When considering solar financing, it’s important to understand the difference between Third Party Ownership (TPO) and Ownership options.
Third Party Ownership (TPO)
Under TPO models—such as leases and PPAs—a third party owns the solar equipment. The customer simply pays a monthly fee or agrees to purchase the electricity generated. This approach typically requires little to no upfront investment and shifts responsibility for maintenance and repairs to the third party. However, there are some drawbacks:
- Maintenance and Roof Repairs: With TPO arrangements, the third party is usually responsible for routine maintenance, but customers may face complications if roof repairs or replacements are needed. Since the solar panels are mounted on your roof, any damage or structural issues can become a point of negotiation between you and the third-party owner. We've seen this sometimes take 6-12 months for both insurance and non-insurance repairs.
- Limited Financial Incentives: TPO customers often do not directly benefit from federal tax incentives, which are typically reserved for system owners. They also typically do not benefit from performance based incentives, such as SRECs.
Ownership Options
Ownership options include purchasing your solar system outright with cash or financing the purchase with a loan. When you own the system:
- Direct Incentives: You can take advantage of federal tax incentives and any available state or local rebates. You can also take advantage of various performance based incentives such as SRECs.
- Long-Term Savings: Although the upfront costs are higher, owning your system generally leads to greater long-term savings and greatly increased ROI.
- Maintenance Responsibility: As the owner, you are responsible for system maintenance, although many of our financing packages include service agreements.
Delving into Financing Options
Let’s explore each financing option in more detail.
Lease Financing
How It Works:
Leasing a solar system means you pay a fixed monthly fee to use the equipment, while a third party retains ownership.
Pros:
- No Upfront Costs: Minimal to Zero initial investment required.
- Predictable Payments: Fixed monthly rates help with budgeting.
Cons:
- Maintenance & Roof Repairs: The leasing company is responsible for maintenance, but any issues related to roof integrity can complicate the lease agreement.
- No Federal Tax Benefits: Customers do not directly receive tax incentives, as these go to the owner.
- No SRECs: Performance based incentives are retained by the third-party owner of the solar system.
Power Purchase Agreements (PPAs)
How It Works:
With a PPA, you agree to buy the electricity generated by the solar system at a predetermined rate, without owning the system.
Pros:
- No Upfront Investment: Like leases, PPAs require little to no initial cost.
- Lower Energy Bills: You pay only for the power produced, often at a rate lower than local utility rates.
Cons:
- Maintenance Challenges: While the third party handles maintenance, any necessary roof repairs still require coordination.
- No Tax Incentives: As with leases, federal tax benefits are claimed by the system owner.
Loan Financing
How It Works:
Taking out a loan allows you to finance the purchase of your solar system, meaning you own it outright once the loan is repaid.
Pros:
- Tax Incentives: As the owner, you’re eligible for federal and local tax credits.
- Long-Term Savings: Higher upfront investment can lead to better overall savings on your energy bills.
- You're in Control: You determine when and how the system is maintained and who maintains it.
Cons:
- Upfront Costs: While the loan spreads out the cost, you still need to qualify and commit to monthly payments.
- Maintenance Responsibility: Ownership means you’re responsible for repairs and routine maintenance unless covered by a service plan.
Cash Purchase
How It Works:
Paying cash for your solar system is the most straightforward method and means you own the system immediately.
Pros:
- Maximum Savings: No interest payments or loan fees.
- Immediate Eligibility for Incentives: You receive all applicable tax credits and rebates.
- Full Control: You’re in charge of maintenance and repairs.
Cons:
- High Initial Outlay: The upfront cost can be prohibitive for many customers.
- Maintenance & Roof Repairs: You bear all the responsibility for any repair work, which can be a significant consideration if roof work is needed.
Impact on Home Sales
When it comes time to sell your home, the method you used to finance your solar system can significantly affect the process and the value of your property.
For PPA/Lease Agreements
- System Transfer: With a PPA or lease, the solar system is typically transferred to the buyer after the sale. This transfer requires coordination with the current solar provider.
- Lease Buyout Considerations: If you’re in a lease and have reached the buyout term, it is often recommended to use the proceeds from the home sale to buy out the lease. This allows you to convey the solar system as an owned asset, simplifying the sale and potentially increasing buyer confidence.
For Loan Financing
- Payoff or Assignment: With a loan-financed system, you generally have two options when selling your home:
- Use the proceeds from the sale to pay off the remaining balance.
- Transfer or assign the loan to the new owner, if the lender permits.
For Cash Purchases
- Simple Conveyance: Cash-purchased systems are the simplest to handle during a home sale, as the solar system automatically conveys as a fixture with the property.
- Increased Home Value: Ownership of a solar system can add significant value to your home. For instance, in Pennsylvania, it’s not uncommon to see an increase in home value by about 4-6% when the system is owned.
The Case for Lease Buyout
For many customers, especially those without a significant tax liability, TPO options like leases or PPAs might seem attractive at first due to low upfront costs. However, a lease buyout can make tremendous sense for the following reasons:
- Access to Tax Incentives: Buying out your lease transfers ownership to you, allowing you to take advantage of federal tax credits and other financial incentives.
- Long-Term Savings: Although the initial cost might be higher, the potential long-term savings from lower energy bills and government incentives can be substantial.
- Avoiding Maintenance Issues: Once you own the system, you can manage maintenance proactively, including addressing roof repairs in a timely manner—eliminating the complications that can arise when a third party is involved.
For customers who do not have the tax liability to justify a TPO model, a lease buyout effectively converts a low-cost entry into a valuable investment, paving the way for enhanced savings and greater control over your solar asset.
Conclusion
Choosing the right solar financing option is a balance between upfront costs, long-term savings, and the level of responsibility you’re prepared to assume. Whether you opt for a lease, PPA, loan, or cash purchase, understanding the nuances between Third Party Ownership and Ownership options is essential. For those who may not fully benefit from tax incentives under a TPO model, considering a lease buyout could unlock significant financial benefits while mitigating potential maintenance and roof repair challenges.
Embrace the future of clean energy by selecting the financing method that best aligns with your financial situation and energy goals. If you have any questions or need further advice on solar financing, feel free to reach out!
