Are Solar Panels Free - Sentinel Solar

Are solar panels free?

Someone may have knocked on your door, or you may have seen an ad promoting free solar panels. Sounds too good to be true, right? Let’s find out, but here’s a hint: The familiar adage of “There is no such thing as a free lunch” still applies.

This arrangement is what the industry calls “third-party ownership” where a third-party pays to install a system on your property. They own and operate the system and collect all of the incentives. Then they sell you the electricity the system generates at a fixed monthly cost (a “solar lease”) or a fixed electricity price per kilowatt-hour (a “solar power purchase agreement” or PPA). Behind the scenes third-party ownership involves multiple parties and complex structures as you can see by the example below.

Source: PV Magazine

Are solar panels free?

Someone may have knocked on your door, or you may have seen an ad promoting free solar panels. Sounds too good to be true, right? Let’s find out, but here’s a hint: The familiar adage of “There is no such thing as a free lunch” still applies.

This arrangement is what the industry calls “third-party ownership” where a third-party pays to install a system on your property. They own and operate the system and collect all of the incentives. Then they sell you the electricity the system generates at a fixed monthly cost (a “solar lease”) or a fixed electricity price per kilowatt-hour (a “solar power purchase agreement” or PPA). Behind the scenes third-party ownership involves multiple parties and complex structures as you can see by the example below.

Source: PV Magazine

When you might consider a solar lease or solar PPA

While you’re almost always better off owning your own home solar system, there are a few scenarios where a solar lease or PPA might make sense:

You don’t have the tax liability to fully utilize the federal tax credit

For example, if a proposed system costs $30,000, the federal tax credit would be $9,000 ($30,000 x 30%). While you can carry forward the unused portion of the tax credit into future years, you can only do so while the tax credit program is in place. Right now it is scheduled to end in 2032, so if you don’t anticipate having to pay $9,000 in taxes over the remaining lifetime of the program, you may be better off with a solar lease or PPA.

You don’t want to be responsible for the system if something breaks

While this is an entirely valid reason to decide not to own your system, there are some considerations you should weigh. Good manufacturers make solar equipment that is now very reliable. On average, one out of every 100,000 solar panels has a deficiency, and one out of every 2,000 inverters may have a defect. Simply put, the chances of something going wrong are very low if you choose the right equipment and the right contractor to install your home solar system. Remember that almost all solar equipment comes with a 25 year warranty.

When you might consider a solar lease or solar PPA

While you’re almost always better off owning your own home solar system, there are a few scenarios where a solar lease or PPA might make sense:

You don’t have the tax liability to fully utilize the federal tax credit

For example, if a proposed system costs $30,000, the federal tax credit would be $9,000 ($30,000 x 30%). While you can carry forward the unused portion of the tax credit into future years, you can only do so while the tax credit program is in place. Right now it is scheduled to end in 2032, so if you don’t anticipate having to pay $9,000 in taxes over the remaining lifetime of the program, you may be better off with a solar lease or PPA.

You don’t want to be responsible for the system if something breaks

While this is an entirely valid reason to decide not to own your system, there are some considerations you should weigh. Good manufacturers make solar equipment that is now very reliable. On average, one out of every 100,000 solar panels has a deficiency, and one out of every 2,000 inverters may have a defect. Simply put, the chances of something going wrong are very low if you choose the right equipment and the right contractor to install your home solar system. Remember that almost all solar equipment comes with a 25 year warranty.

Why solar leases and PPAs don’t make sense for most homeowners

Here’s why most homeowners are better off owning their home solar system. When you sign a solar lease or solar PPA…

You’re not eligible for any rebates or incentives

Because you don’t own the solar panels, you are not eligible to claim any tax credits, rebates, or other incentives. All of those go to the company that owns the solar panels.

You’re making a long-term commitment

Most solar leases and PPAs have a 15-20 year contract term. So when you sign up for a solar lease or PPA, you’re committing to buy electricity produced by the solar panels installed on your property (that someone else owns and at their price) for a long time.

Your cost of electricity will increase

Most contracts have an annual “escalator” clause. That means that your payments will increase every year. Even if it seems like the escalation percentage is small (most are in the range of a 1.9% to 2.9% increase per year), that increase year after year over 15-20 years will add up.

Selling your home is more complicated

These types of contracts can complicate a home sale. Before you sell your home, you’ll need to buy out the remaining contract term (which involves a lump sum payment) or convince the new owner to assume the rest of the contract, if they qualify to do so.

Why solar leases and PPAs don’t make sense for most homeowners

Here’s why most homeowners are better off owning their home solar system. When you sign a solar lease or solar PPA…

You’re not eligible for any rebates or incentives

Because you don’t own the solar panels, you are not eligible to claim any tax credits, rebates, or other incentives. All of those go to the company that owns the solar panels.

You’re making a long-term commitment

Most solar leases and PPAs have a 15-20 year contract term. So when you sign up for a solar lease or PPA, you’re committing to buy electricity produced by the solar panels installed on your property (that someone else owns and at their price) for a long time.

Your cost of electricity will increase

Most contracts have an annual “escalator” clause. That means that your payments will increase every year. Even if it seems like the escalation percentage is small (most are in the range of a 1.9% to 2.9% increase per year), that increase year after year over 15-20 years will add up.

Selling your home is more complicated

These types of contracts can complicate a home sale. Before you sell your home, you’ll need to buy out the remaining contract term (which involves a lump sum payment) or convince the new owner to assume the rest of the contract, if they qualify to do so.

What are my options for purchasing solar panels?

The cost of installing solar panels varies widely based on a variety of real factors, but even comparable systems in the same area can be priced very differently. We outline all the factors that affect solar panels’ cost here, but you can expect to pay $20,000 to $30,000 for a typical residential solar panel system.

$20,000 to $30,000 is a significant investment! However, if you want to take full advantage of the savings offered by a solar panel system by owning it yourself, you have several options for purchasing a system. The good news is that even if you don’t have cash sitting in your bank account to pay for a home solar system, you have many options available to finance a home solar purchase.

Serious,Worried,African,American,Couple,Reading,Documents,Consider,Mortgage,Loan

Before we get into the details, it’s important to start with a basic understanding of your current financial situation and your financial goals. Here are a few questions to ask yourself:

How much cash do I have available?

Cash can be used to purchase the system outright or can be used for a down payment which will lower your monthly payments on a loan.

Are there other things that I might want to use that cash for?

Consider your other options for that cash such as contributing to a retirement plan or investing in the stock market. Always make sure that you have a comfortable cash reserve for emergencies.

What is my credit score?

A higher credit score means that you’ll be eligible for more financing options and will pay a lower interest rate. Most financing requires a credit score of 650 or higher.

How much equity do I have in my home?

Home equity can be a good, low-cost source of financing for home solar or other home improvement projects. Make sure that you understand the difference between a home equity loan and home equity line of credit.

We’ll discuss each of the options to finance a home solar purchase in more detail below.

What are my options for purchasing solar panels?

The cost of installing solar panels varies widely based on a variety of real factors, but even comparable systems in the same area can be priced very differently. We outline all the factors that affect solar panels’ cost here, but you can expect to pay $20,000 to $30,000 for a typical residential solar panel system.

$20,000 to $30,000 is a significant investment! However, if you want to take full advantage of the savings offered by a solar panel system by owning it yourself, you have several options for purchasing a system. The good news is that even if you don’t have cash sitting in your bank account to pay for a home solar system, you have many options available to finance a home solar purchase.

Before we get into the details, it’s important to start with a basic understanding of your current financial situation and your financial goals. Here are a few questions to ask yourself:

How much cash do I have available?

Cash can be used to purchase the system outright or can be used for a down payment which will lower your monthly payments on a loan.

Are there other things that I might want to use that cash for?

Consider your other options for that cash such as contributing to a retirement plan or investing in the stock market. Always make sure that you have a comfortable cash reserve for emergencies.

What is my credit score?

A higher credit score means that you’ll be eligible for more financing options and will pay a lower interest rate. Most financing requires a credit score of 650 or higher.

How much equity do I have in my home?

Home equity can be a good, low-cost source of financing for home solar or other home improvement projects. Make sure that you understand the difference between a home equity loan and home equity line of credit.

We’ll discuss each of the options to finance a home solar purchase in more detail below.

Cash or home equity financing

Paying cash will get you the best price and best return on your home solar investment because you won’t have to pay fees or interest, which will eat away at your financial return. If you’re thinking of paying cash, you’ll first want to consider other uses for that cash. Are there other big-ticket items that you’ll want to purchase in the next few years? After a cash purchase, will you still have a comfortable cushion of savings in the bank in case of an emergency?

If you decide to pay cash, you’ll want to pay attention to the estimated payback of the solar panel system. For example, an eight-year payback means that you’ll have recouped the amount you paid for the system in eight years. Remember that solar panel systems come with 25 year warranties and there’s a good chance that they could last longer.

The second most efficient way to purchase solar is to use a home equity loan or line of credit. The fees and interest on home equity loans or lines of credit are much less than those of a solar loan since they are secured by your home AND the interest you pay may be tax-deductible (consult your tax professional to determine what you can deduct on your taxes).

When considering a home solar purchase financed by home equity, you’ll want to compare your monthly repayment obligation to the estimated monthly energy savings. If you can save as much or more than your monthly repayment, your home solar system is effectively paying for itself.

Cash or home equity financing

Paying cash will get you the best price and best return on your home solar investment because you won’t have to pay fees or interest, which will eat away at your financial return. If you’re thinking of paying cash, you’ll first want to consider other uses for that cash. Are there other big-ticket items that you’ll want to purchase in the next few years? After a cash purchase, will you still have a comfortable cushion of savings in the bank in case of an emergency?

If you decide to pay cash, you’ll want to pay attention to the estimated payback of the solar panel system. For example, an eight-year payback means that you’ll have recouped the amount you paid for the system in eight years. Remember that solar panel systems come with 25 year warranties and there’s a good chance that they could last longer.

The second most efficient way to purchase solar is to use a home equity loan or line of credit. The fees and interest on home equity loans or lines of credit are much less than those of a solar loan since they are secured by your home AND the interest you pay may be tax-deductible (consult your tax professional to determine what you can deduct on your taxes).

When considering a home solar purchase financed by home equity, you’ll want to compare your monthly repayment obligation to the estimated monthly energy savings. If you can save as much or more than your monthly repayment, your home solar system is effectively paying for itself.

Loan financing

If you don’t have cash or home equity financing available or those funds are earmarked for something else, solar loans are a good way to finance the purchase of a home solar system. Solar loans work the same way as loans for other purchases, and generally, if your credit score is above 650, you’ll qualify for a solar loan. Loans can come from a bank, a credit union, a utility, or other financial institution and sometimes may be subsidized by a state or utility program.

When financing your home solar with a loan, it’s important to know that most loans have “dealer fees” which a contractor pays when they sell a loan. These dealer fees are passed along to the customer and are typically not disclosed to homeowners. If you’ve ever had a contractor offer you a “cash discount”, chances are they are offering that discount because they won’t have to pay the dealer fee if you pay cash.

Dealer fees are based on a percentage of the purchase price of the system. So a 20 percent dealer fee on a $30,000 system will be $6,000 ($30,000 x 20%). Dealer fees will vary based on the length of the loan, with longer duration loans having higher dealer fees, but the more significant driver of the dealer fee is the interest rate of the loan. So a solar loan with a 2.99 percent interest rate will have a higher dealer fee than a solar loan with a 5.99 percent interest rate. Dealer fees can reach as high as 30 percent of the system cost, so it’s essential that you’re aware of the impact of these fees and that your solar contractor has a relationship with a reputable loan provider.

Many solar loans offer an interest-free portion of the loan, which is equivalent to your expected tax credit (26% of the total system cost), allowing you to pay back that portion of the loan when you receive your tax credit. If considering a solar loan with this type of structure, it’s important to understand what your initial monthly payments will be versus your monthly payments after repayment of the tax credit since your monthly payment will decrease after you pay off the tax credit portion of the loan.

For solar loans, the bottom line is essentially the same as with home equity financing – if your monthly energy savings from solar is equal to or more than your monthly loan repayment, your home solar system is effectively paying for itself. Once the solar loan is paid off, you own the system free and clear and keep all of the energy savings and incentives for the remaining lifetime of the system.

Loan financing

If you don’t have cash or home equity financing available or those funds are earmarked for something else, solar loans are a good way to finance the purchase of a home solar system. Solar loans work the same way as loans for other purchases, and generally, if your credit score is above 650, you’ll qualify for a solar loan. Loans can come from a bank, a credit union, a utility, or other financial institution and sometimes may be subsidized by a state or utility program.

When financing your home solar with a loan, it’s important to know that most loans have “dealer fees” which a contractor pays when they sell a loan. These dealer fees are passed along to the customer and are typically not disclosed to homeowners. If you’ve ever had a contractor offer you a “cash discount”, chances are they are offering that discount because they won’t have to pay the dealer fee if you pay cash.

Dealer fees are based on a percentage of the purchase price of the system. So a 20 percent dealer fee on a $30,000 system will be $6,000 ($30,000 x 20%). Dealer fees will vary based on the length of the loan, with longer duration loans having higher dealer fees, but the more significant driver of the dealer fee is the interest rate of the loan. So a solar loan with a 2.99 percent interest rate will have a higher dealer fee than a solar loan with a 5.99 percent interest rate. Dealer fees can reach as high as 30 percent of the system cost, so it’s essential that you’re aware of the impact of these fees and that your solar contractor has a relationship with a reputable loan provider.

Many solar loans offer an interest-free portion of the loan, which is equivalent to your expected tax credit (26% of the total system cost), allowing you to pay back that portion of the loan when you receive your tax credit. If considering a solar loan with this type of structure, it’s important to understand what your initial monthly payments will be versus your monthly payments after repayment of the tax credit since your monthly payment will decrease after you pay off the tax credit portion of the loan.

For solar loans, the bottom line is essentially the same as with home equity financing – if your monthly energy savings from solar is equal to or more than your monthly loan repayment, your home solar system is effectively paying for itself. Once the solar loan is paid off, you own the system free and clear and keep all of the energy savings and incentives for the remaining lifetime of the system.

How do I decide what financing to use for my home solar system?

Solar,Panels,Installed,On,A,Townhouse,On,The,East,Coast

Like any other purchase (a car for example), how you decide to finance that purchase is very specific to your current financial situation and future financial plans and goals. You need to understand both the costs and terms associated with your financing options as well as the financial benefits provided by your home solar system (energy savings, rebates and incentives). Here are some questions to think through:

How much tax do I expect to pay?

Will I have enough tax liability in the next year or two to fully utilize the federal investment tax credit and any other available tax credits?

What’s the best use of my cash?

Do I have extra cash that I can use for solar panels? Is the financial return that the proposed solar panel system provides greater than other investments which I could use that cash for?

What are my financing options?

What are the terms (time and interest primarily) of the potential financing arrangements? Would the financial benefit of my solar panel system outweigh the terms of the financing?

How long do I plan on living in this home?

Is a financing arrangement going to be a burden on the sale of my home? Would I have to come up with significant amounts of cash to buy out a financing arrangement before selling my home?

How good is my home solar design?

Are the system design and solar panel locations going to maximize the amount of solar energy and savings that my investment will generate?