Leasing solar, too good to be true?

by John Walter

In 2013, solar exploded in California. Growth was driven by third-party leases and power purchase agreements; three out of four solar systems installed were owned by a third-party tax equity group. And, what’s not to like? No money up-front, immediate utility savings, no hassle.

Not so fast.

In most cases, leasing, aka a Power Purchase Agreement (PPA), is too good to be true. It pays to own your solar system, particularly since there are multiple options to finance 100% of the investment.

Flushing Your Tax Credits Down the Toilet

The third party owns the system and receives all the earned tax credits. A tax credit—an adjustment against the taxes you owe—is earned by the owner of the solar system, i.e. the company from which you are leasing your system. For example, you’d qualify for a tax credit of 30% of the cost of your solar energy system, e.g., a $20k system would give you a $6k tax credit. No ownership = no tax credit.

How Leasing Companies Make Their $$

Solar leasing companies are financiers first. They are not offering to lease the systems they own to you to give you the greatest ROI. They’re out to generate electricity on your roof, sell it to you, and maximize their own ROI. This leads to two important questions:

  1. When leasing equipment to you no longer makes them real money, will these third-party financiers continue to honor their contracts? The third party owners are motivated to install systems that generate the predicted amount of power for at least six years—in order to receive all the tax benefit for investors. After that, it’s easy to question why the owner would feel compelled to fulfill service obligations when it will receive little to no money (the amount received depends on the program).
  2. When their promises to you are broken, will you easily be able to take ownership of the system? If there are problems that need addressing, the solar equipment leasing company may sell the system to the homeowner, but contracts typically don’t obligate them to do so. It’s conceivable that the homeowner becomes stuck paying to repair a system they don’t own. Financiers don’t have a stellar track record.

Roof At Risk

You, the homeowner, assign the rights to your roofing surface to the third-party owner. And, normally, no roof-leakage warranties are provided. Furthermore, if you do not own your solar system, the value of your home does not increase; in many cases, it will decrease (due to the need to transfer the lease upon sale of your home).

Oceanfront property in Arizona?

The value of “no-hassle solar care and maintenance” is less than third-party solar investors advertise. Most solar power systems require no maintenance, other than occasional cleaning, which is not included with a lease. Some leasing companies advertise that they’ll replace the inverters for free, but your inverter won’t need replacing for at least 10 years. And the cost of replacement is far lower than third-party leasing companies claim.

Leasing Could Interfere With Selling Your Home

Leasing might decrease, rather than increase, the resale value of your home. When you sell your home, your contract with the solar equipment leasing company might not be transferrable to the new owner, thus complicating your home sale. Ouch.

Rethink

We’re not alone in rethinking the role of these leases. With the advent of other solar financing options, leasing peaked in late 2013 in both California and nationally. Homeowners are choosing other finance options—Home Equity Lines of Credit (HELOC), PACE financing, non-recourse credit union loans—that cover 100% of their solar system installation costs, feel more secure in ownership of their system, and let them reap the return on their investment.

Caveat

Sometimes, leasing makes sense if the other financing options won’t work. But be aware of the tradeoffs.

John Walter is cofounder of RepowerYolo, a Davis-based community group purchase program that simplifies the process and reduces the cost of going solar. Yolo County homeowners save $4,500, on average, through their discount, available to the first 100 homeowners who sign up. Learn more at http://repoweryolo.com.

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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5 Comments

  1. Dave Hart

    Welllll, we signed a lease contract 18 months ago and much of the draw was not having to worry about equipment failure. The contract states that for every Kwh not generated during an outage, the company pays us back for energy not generated. The contract says they take care of all repairs to equipment and the roof will be left in the same (like new) condition if and when the panels are removed. The system is transferable to all subsequent owners (we have no intention of moving anyway), the leasing company would allow us to take full ownership with no additional cash transaction at the close of five years. I suppose it all boils down to (a) the desire of the company to be in business for the long term and (b) the extent to which the contract means what it says if we have to go to court. In any case, we are on track to breaking even on our side of the investment in another seven years. So far, we’re happy. Fingers crossed just as much as if we had installed the system ourselves and hoped nothing would go wrong. Good points you’ve raised here and I much appreciate how you’ve teased it all out into plain English.

    1. Matt Williams

      TBD, when you make a capital investment, for instance purchase a car, the cost per unit of use is impossible to calculate … until you know what the actual use is.  Using the car example if you spend $25,000 on the car and drive it for 25,000 miles during its lifetime the cost per mile is $1.00 plus gas costs plus maintenance costs.  If you drive it 100,000 miles during its lifetime the cost per mile is $0.25 plus gas costs plus maintenance costs.

      Solar is the same.  In order to get cost per kw/h the capital costs you incurred putting in the system are spread across your actual kw/h demand.  If you demand more your cost per kw/h goes down.   If you demand less your cost per kw/h goes up.Until you know what your actual use is, you are gazing into a crystal ball.

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