Solar Energy Financing Options: A Comprehensive Guide

Solar energy has seen explosive growth in recent years as homeowners, businesses, and utilities adopt clean, renewable power. Solar panel installations increased by over 50% in 2021 alone in the U.S. However, the upfront cost of solar panels remains prohibitive for many. That’s where solar financing comes in – making solar energy affordable and accessible through loans, leases, and other options.

This comprehensive guide examines the most popular solar financing options’ pros, cons, and details. We’ll look at:

• Solar Loans
•  Solar Leases
•  Solar PPAs
•  Cash Purchases
•  Solar Renewable Energy Certificates
•  Solar Tax Credits and Incentives

We’ll also compare the financing options in a table to help you determine the best choice for your needs and budget.

How Does Solar Financing Work?

Before diving into specifics, let’s look at how solar financing works at a high level.

Solar financing provides a way to pay over time for your solar panel system rather than all upfront. This helps spread out the cost over many years and lowers the barrier to adoption.

Most solar financing either involves:

• Loans: You borrow money to purchase your solar panel system, then repay the loan over time with interest. You own the system.
•  Leases: A solar company installs a system on your home for little/no down payment. You pay a fixed monthly rate over the lease term, typically around 20 years. The solar company owns the system.
•  Energy Sales: Known as a PPA (power purchase agreement), you pay a solar company for the energy produced from their system installed on your property over a term of 20+ years. They own the system.

Now, let’s dive into the details of each major solar financing option.

Community Solar

One of the most popular solar financing options is a solar or solar energy loan. This allows you to borrow the funds needed to purchase and install a complete solar panel system. The loan is then repaid over time, like any other loan.

Some key advantages of solar loans include:

• You own the system – Solar loans allow you to own your system outright. This means you can claim tax credits, incentives, and rebates. You also get the long-term value and full use of your system over its 20-30-year lifespan.
•  Fixed interest rates – Most solar loans offer fixed interest rates, which act as a hedge against rising energy prices. Rates for solar loans are very competitive, often between 3-8%.
•  Use tax credits to pay down faster – You can apply federal and local solar tax credits to reduce your loan principal faster. This saves on interest costs over the life of the loan.
•  May increase home value – Research indicates installing solar can increase your home’s resale value. Ownership also makes it easier to sell than leased systems.

Potential drawbacks include:

• Higher upfront cost – Even with a loan, you’ll likely have to pay 10-25% of the total system cost upfront. This down payment cost is higher than solar leases.
•  Loan approval required – You’ll need good credit and debt-to-income ratios to qualify and receive competitive rates.
•  Responsible for maintenance – With system ownership comes maintenance responsibilities. You’ll need to clean panels and may eventually need to replace inverters.

Overall, solar loans allow homeowners to affordably own systems to lock in long-term solar savings. Loans spread costs over time while allowing owners to maximize tax benefits.

Solar Leases

Solar leases have been the most popular solar financing option over the past decade. Leases allow homeowners to go solar for little to no money down in exchange for monthly payments to a solar company.

With solar leases, a solar company installs, owns, and maintains the solar panel system on your home in exchange for lease payments over a term of around 20 years. Key benefits of solar leases include:

• Little to no money down – Solar leases typically only require a first month’s payment upfront, from $0 to $1,000. This greatly reduces the barrier to entry over purchasing.
•  Fixed monthly payments – Solar lease payments are pre-set at a fixed monthly rate. This provides certainty around what you’ll pay each month for predictable bill savings.
•  Solar company handles maintenance – With a lease, the solar company remains responsible for all operations and maintenance of its system over the lease term.
•  No loan approval needed – If you have good credit, solar leases don’t require formal loan approval like financing a purchase does.
•  Possible to buy lease – Some leases offer options to buy out the remainder of the lease and take ownership of the system.

The downsides of solar leases include the following:

• No ownership – You don’t own the system or receive tax credits or incentives. The solar company owns the system.
•  Payments continue even after paid off – Unlike a loan, payments continue for the full 20-year term regardless of when the system may be “paid off”.
•  More work to sell home – Leases can complicate home sales. Some solar companies charge fees to transfer panels or disallow them altogether.
•  Escalator clauses – Some leases add annual payment escalators up to 3% per year. This reduces long-term savings certainty.

Solar leases allow homeowners to go solar for the least upfront cost. Leasing avoids system ownership, taxes, and maintenance in exchange for predictable monthly clean energy payments.

Solar Power Purchase Agreements (PPAs)

A popular way to finance solar power systems is through Solar Power Purchase Agreements (Solar PPAs). This financing model allows you to access solar energy without needing to cover initial purchasing and installation costs. Instead, a solar developer owns the equipment. They handle the installation on your property and ongoing maintenance. As the host site, you simply pay for the solar power generated through a long-term contract. So Solar PPAs provide a turnkey solution, delivering cost-competitive solar energy with minimal financial burden. It’s an accessible path to reap the rewards of solar through predictable, managed payments tied directly to system production.

PPAs allow homeowners and businesses to buy solar energy without purchasing a system. Key aspects include:

• No upfront cost – Like leasing, PPAs require no down payment. However, PPAs can also be used for larger commercial installations that leases don’t cover. The developer covers all hardware and installation costs.
•  Pay-for-energy model – Rather than fixed monthly lease payments, you pay only for the kilowatt-hours (kWh) of energy produced by the system. Rates are pre-set to provide long-term savings vs. utility prices.
•  Solar company owns the system – The developer maintains complete ownership and responsibility over the system for the duration of the PPA term, typically 20-25 years.
•  Stable pricing – Because energy rates are contracted upfront, PPAs hedge against rising electricity costs. Rates may only rise by a fixed percentage each year.
•  Tax benefits go to the solar company – The developer receives and monetizes tax credits, accelerated depreciation, and other incentives since they own the asset.

Downsides of PPAs include:

• No ownership – Like leasing, you don’t own the system on your property and miss out on tax benefits and incentives.
•  Requires good credit – You’ll still need a strong credit score for most developers to approve a decades-long PPA.
•  Can’t claim 100% renewable energy – Some developers may prohibit claiming their solar as “your renewable energy” since you don’t own the asset.
•  Selling a home can be complicated – Transferring decades-long PPAs involves paperwork and re-approval of new owners.

Overall, Solar PPAs provide a zero-money down, pay-for-production model that can attract larger commercial customers. However, households benefit more from ownership and tax incentives.

Cash Purchases

Purchasing solar panels with cash outright or with money from your financing sources provides homeowners with maximum long-term benefits. By using cash, you become the outright owner of the solar panel system on your property. Benefits of cash purchases include:

• Full ownership and use of the system – You own the system to maximize benefits from tax credits, net metering savings, recouping costs over time and more.
•  Avoid interest and finance charges – Without financing through a lender, you avoid paying interest, which reduces long-term costs.
•  Maximum tax incentives – Tax credits and accelerated depreciation provide huge savings, making ownership lucrative. Cash purchases allow claiming the full value.
•  Improved home value – Research shows solar can increase resale value by 4.1% on average. As an owner, your system may add an appraisal value boost.
•  Hedge against rising energy prices – Locking in solar can stabilize energy costs and provide insulation from volatile utility prices.

Challenges with cash purchases include:

• High upfront cost – Purchasing solar panels in cash requires large existing reserves or liquidity from other assets. Many homeowners don’t have the $10,000 to $30,000+ needed.
•  No outside maintenance or operation – You take on all maintenance and operational responsibilities over the system’s lifetime.
•  Missing lease benefits – For those unable to buy, leases offer similar benefits without the large upfront price tag.

For homeowners with sufficient savings, cash purchases provide maximum long-term benefits from owning your own renewable energy source. However, the high upfront cost makes solar difficult without financing.

SRECs: Solar Renewable Energy Certificates Explained

Solar Renewable Energy Certificates (SRECs) provide an alternative way to help finance solar panel installations and offset costs over time. SRECs are available in many states as part of renewable portfolio standards (RPS), requiring utilities to source a portion of energy from solar.

Here’s an overview of how SRECs work:

• For each 1,000 kWh of solar energy produced from your system, you earn 1 SREC.
•  SRECs can then be sold on open markets to utilities, typically for $100 to $300 each, depending on local supply and demand dynamics.
•  Revenue earned from selling SRECs provides an additional income stream from your solar energy system.
•  This added income improves ROI and helps offset both purchase costs and solar loan payments.
•  SRECs gradually phase out over time as RPS requirements are met. Their revenue value declines annually in a given market.
•  Most SREC markets provide around 5-10 years of strong values before declining. So, they provide added ROI during the most valuable period after installing solar.
•  To claim SRECs and sell into these markets, you must own your solar panel system rather than lease or use a PPA.

Key benefits provided by SRECs include:

• Added revenue to buy down solar costs by 10-30% in early years
•  Accelerate returns and break timeline on solar investments
•  Increase ROI over the life of your system
•  Help finance the purchase of solar panels and related costs
•  Provide more value during the most critical early years after installation

In the right markets, SRECs create huge additional value from owning solar. Be sure to research the SREC policy and prices in your local area.

Federal Solar Tax Credits and Incentives

The federal government provides two huge tax-based incentives to help subsidize the cost of installing solar panels. Together, these can reduce costs by 50-75%.

1. Federal Solar Tax Credit

The federal Investment Tax Credit (ITC) provides a 26% credit against the entire cost of installing a residential solar energy system. So if you install solar costing $20,000, you’d receive a $5,200 tax credit (26% of $20,000).

Key facts about the federal solar tax credit include:

• This applies to both homeowner and business solar installations
•  There is no maximum cap on the credit value; 26% of the total system cost
•  Can be claimed on federal tax return in the year of solar installation
•  Credit reduces tax bill dollar-for-dollar; $1 tax credit = $1 less tax owed
•  Excess credit can roll over to future years if unused
•  Requires owning solar system (not third-party/lease) to claim
•  Scheduled to decrease from 26% to 22% in 2023

This provides a huge reduction in effective solar costs. The tax credit can also pay down a solar loan principal to reduce interest costs.

1. Solar Depreciation Benefits

Businesses can also write off 85% of solar installation costs using accelerated depreciation over five years. Combined with the 30% federal tax credit, this cuts the effective after-tax cost of installing solar by around 75% for commercial properties.

These incentives make owning solar panels very compelling from a tax perspective. Just be sure to consult your tax professional to maximize benefits.

State and Local Solar Tax Credits

In addition to federal tax credits, many state and local governments also offer tax credits and additional incentives for installing solar panels. State tax credits include:

• Massachusetts – 26% refundable credit off system cost. No cap.
•  New York – 25% credit capped at $5,000 max.
•  California – 15% credit with no maximum limit.
•  Arizona – 10% solar tax credit on installation costs.
•  Colorado – 30% capped at $2,000 max. Declining yearly.
•  Utah – 25% credit. It will fall to 10% by 2025.
•  North Carolina – 35% credit on system costs. No cap.

Plus, additional incentives like sales tax exemptions, rebates, net metering benefits, and SRECs provide even more savings:

• NJ – Sales tax exemption on solar equipment.
•  San Antonio, TX – Rebates and incentives up to $15,000
•  VA – Rebates of $1,000 per kW, up to $3,000 per home.

Be sure to research available state credits and local utility incentives where you live. They can often cut costs by 20% or more.

Comparing Home Solar Financing Options

Here is a comparison of the main solar panel financing options for homeowners:

Solar Financing Option, Solar Loans, Solar Leases, Solar PPAs & Cash Purchase

Overview Borrow to purchase system. Repay over time. Zero down lease. Fixed payments for electricity. Pay-as-you-go for system electricity. Purchase system outright with cash.

Upfront Costs 10-25% down payment Little to no money down $0 down Full system cost paid upfront

Own System Yes No No Yes

Maintenance Owner responsibility Included Included Owner responsibility

Payments Loan payment. Interest adds cost. Fixed monthly lease payments are based on the energy produced. No payments. But the full upfront cost

Tax Credits Owner claims Lessor/sponsor claims Lessor/sponsor claims Owner claims

Terms 10-20 years 20 years 20-25 years N/A

Net Metering Keep excess energy value Keep excess energy value Keep excess energy value Keep excess energy value.

Sell Home Easier. Buyer inherits panels/loan. Lease transfer is often required. Fees common Contract transfer often required Increases home value.

As you can see, each solar financing option carries pros and cons. Important differences include upfront costs, ownership and taxes, long-term payments, and maintenance obligations.

Homeowners seeking the greatest long-term savings are typically best off buying solar panels through financing loans or cash purchases. However, leases and PPAs can provide easier access to solar energy with less money down.

Carefully compare your needs and financial situation to determine the best solar financing fit.

Frequently Asked Questions

Q: Should I take out a solar loan or pay cash?

A: Paying cash is best financially in the long term, but solar loans spread costs over time for faster access to savings. Choose based on your budget and goals.

Q: Can I get approved for a solar loan with bad credit?

A: It’s more challenging but possible in some cases. Expect higher interest rates. Leases may be easier to qualify for.

Q: What are the best solar loan rates?

A: Prime borrowers can often qualify for around 3-4% APR on solar loans, but 6-8% is more common. Rates depend on credit, loan amount, term length, and other factors.

Q: How much are solar lease payments?

A: A typical monthly lease payments range from $30 – $100 for a standard-sized residential solar system. However, your lease rate depends on many factors.

Q: What are SRECs?

A: Solar Renewable Energy Certificates (SRECs) provide revenue for households and businesses owning solar panels in qualified markets. SRECs help offset solar costs.

Q: Can I claim the federal solar tax credit on a leased system?

A: No, only the Owner of the solar panels can claim the Investment Tax Credit. So, leasing causes you to forfeit this major benefit.

Q: Should I buy or lease solar panels?

A: Buying is usually best financially, but leasing requires less upfront cash. When deciding, weigh your budget vs. desire to own the asset and maximize tax incentives.

Solar Financing Allows Homes to Run on Sunshine

Solar panel costs have dropped dramatically but remain prohibitive for many families to purchase outright. Solar financing options make clean energy from the sun accessible and affordable for homeowners.

Whether you choose a solar loan, lease, cash purchase, or PPA, sunlight can provide electricity bill savings for decades while increasing the value of your property. Lower your home’s carbon footprint while fixing energy costs against utility price spikes.

Solar panels paired with the right financing fit let you harness natural sunshine to power your household affordably and sustainably. The many options reviewed allow homeowners to choose the best solar solution for their needs and budget.