Solar lease Vs. Solar Purchase

Welcome to our inaugural installment of “Solar Talk.” Astralux Solar is pleased to be partnering with Colorado Energy News in presenting this new venue to discuss the most relevant and pressing issues in the solar industry today, and how they may impact you. We hope you will join in the conversation.

By Osea Nelson, Astralux Solar

This first column addresses a topic that has dominated the solar scene this year — SHOULD I BUY OR LEASE MY SOLAR PV INSTALLATION? The decision can be boiled down to two questions. First, what is my investment time horizon? Second, what is my primary reason for going solar?

THE BUY DECISION

Purchasing a solar system enables you, the owner, to fix your power cost at 50% to 90% less than current utility rates today for the next 30+ years (with the savings increasing as electricity rates rise) and increase the equity value in the home or business.

This investment decision requires an outlay of cash upfront, or a commitment to a financing option of some type. It also fits better with an investment plan that includes you living in the house for at least four to five more years. The buy decision rewards the upfront investment of cash with ever increasing return as the rate of energy price increase accelerates and your energy cost drop to zero. Where as the returns on a lease are fixed, returns with the buy decision can continually increase.

As far as the minimal maintenance which would be required is concerned, purchasing a system brings with it the manufacturer’s warranty on the panel and inverters, just as with a lease approach. For the workmanship of the installation, the warranty will vary with each installer, but typically the company will offer coverage of future labor and maintenance costs. With a purchased system, you would be responsible for contacting the installer directly to schedule any repair work, and because it is part of your equity, the responsibility does fall more on the owner.

Specifics:
→ Initial investment or financing: 30-40% of total system cost
→ Investment return horizon: 7-10 years to breakeven for residential, 4-5 years for commercial
→ Future returns: 7-8% immediate ROI, continually increasing returns based on utility rates, increased home equity value ($1 saved = $20 in equity for the property), increased lease rate per square foot and lower vacancy rates (commercial property owner), PR and marketing benefits (business owner)
→ Maintenance: manufactured warranties, installer protection varies by installer; some additional commitment from the buyer

THE LEASE DECISION

With a solar lease agreement, you pay nothing for the system and enter into a contract with the leasing company to essentially fix your power bill at or slightly below current rates. Often the lease agreement may have a rate increase escalator (such as 3% per year), but it will be significantly lower than the typical utility rate increase, so your savings increase over time. The rate of that increase is not as fast as under the ownership scenario, hence the trade off. You do not own the system, nor can you claim its equity value for the home.

Obviously, the leasing decision frees you from the burden of an out-of-pocket cash hit in exchange for less savings down the road and not having ownership of the system. This decision can make sense if you do not have the financial resources to purchase the system outright or you are not as sure about the amount of time you plan on spending in your current property, as the lease can be transferred to the new owners.

Specifics:
→ Initial investment: 0-2% of total system cost
→ Investment return horizon: immediate with $0 down
→ Future returns: fixed electrical bill, protection from future larger increases, increased lease rate per square foot and lower vacancy rates (commercial property owner), PR and marketing benefits (business owner)
→ Maintenance: manufactured warranties, maintenance covered by third party, and since the leasing company is buying the solar production, the lease company and owner have aligned incentives to keep the system maintained; less responsibility for owner

So how to you decide which is right for you? Ask yourself the questions above once more:

Is having a minimal or zero upfront payment the most important for you? If so, the lease may be the way to go.

Is building equity in your home or business and generating a much larger return over a longer period of time the most important? Or, is putting some cash into the project upfront or financing the system ok with you? Then perhaps the buy decision is best for you. Ultimately, it is an investment decision, by leasing a PV installation, you have a greater ROI in the first couple of years, and owning the system delivers a greater ROI over the long-term.

SUMMING IT UP

In the final analysis, multiple factors go into virtually every investment decision, including this one. When you reduce it to the most basic denominator, however, it comes down to timing. The chart below shows the two investments side by side for a 4kw residential system. No matter the size of a system, from small residential to large commercial, the trends in the chart will be the same.



As you can see each investment has its advantages at certain time periods. In the first 1-2 years, the buy decision is going to be more expensive while you wait to realize the tax credits and start eliminating your bill. Over the middle life of these investments (years 2-10), the benefits of leasing and owning the system are relatively similar. As the system ages (years 10-30+) ownership is going to have zero payment, while the lease still has a monthly payment due.

From Colorado Energy News