Now more than ever, it makes sense to own a solar power system instead of leasing one. The savings are significant, since purchasing a system presently pencils out to about 50 percent less than leasing over the long term and the payback period is now as low as three years. As prices continue to drop, more builders and developers are offering solar as standard in their new communities and we expect the trend to continue. Around the country, many solar rebate programs administered by states and utilities have begun to expire or at least are being overhauled. This does not mean that solar is going to die. It’s actually stronger than ever. Even without rebates, solar is now cheaper than the electric utilities in many areas, with grid prices typically rising 5 percent each year.
More Financing Options Make Owning Attractive
The current solar landscape features a range of innovative financing options, including third-party power purchase agreements (PPAs) and leasing, which have all helped bring solar into the mainstream. Now that the price of solar electric systems has dropped so significantly, however, actually purchasing the asset is a better value for homeowners, with some states even offering on-bill financing and PACE.
“Solar energy is now more affordable than ever,” said Rhone Resch, president and CEO of the Solar Energy Industries Association (SEIA), which publishes the U.S. Solar Market Insight quarterly report in collaboration with GTM Research. “For years, there was only one real argument against solar: It was too expensive. That’s no longer the case. When President Carter was in office solar thermal applications dominated, and PV solar panels were, in fact, very costly and used primarily for off-grid and space applications. Since then, the cost of PV has plummeted by more than 97 percent and the industry has become one of the most innovative and entrepreneurial sectors of our economy.”
With 97 percent price declines for solar PV, it’s easy to see why buying a solar electric system is a more attractive option than leasing one.
Homeowners who opt for a solar lease or a PPA lose a lot of the benefits that purchasing the system would give them, including any local incentives, the Federal 30 percent solar tax credit and the renewable energy credits. These incentives are forfeited in exchange for a low upfront or zero down option. Moreover there are many examples calculating the total cost of a 20 year lease vs purchasing the system.
If you look at the cost of electricity down to the kWh, the solar leases are also twice as expensive as owning solar plus there is annual escalator built into them. For example, in California, the average utility rate is $0.20 per kWh and will only increase in the future. Leases start at $0.15-$0.20 with a 2.99 percent annual escalator (annual escalators act like a compounding interest rate and so the rates will increase about 3 percent each year). A solar lease starting at $0.18 per kWh with a 2.99 percent escalator ends up at $0.31 per kWh at the end of the 20 year term. Ownership is locked in at $0.07-$0.08 forever.
These numbers don’t lie, owning solar gives homeowners the cheapest electricity that is locked in and all tax credits and rebates stay with the homeowner whether you buy it or take a loan. If you want the best cost of energy solar ownership is the way to go. Plus there are more considerations to simplify the decision to convert to solar electricity.
Owning Simplifies Buying and Selling
Solar leases are long-term agreements, usually on a 20-year term without the ability to buy out or pay off early. Though the monthly rate set forth in the lease agreement is usually slightly less than the existing monthly electricity bill, the resulting cost per kWh with the lease payment is typically a higher amount than the calculated kWh rate from purchasing the system. It may sound complicated, but it’s much easier to communicate the numbers associated with owning than those associated with leasing.
And once a solar power system is paid off, it can add a tremendous amount of resale value to a home. “People are keyed in to what solar energy does for their pocketbook and the efficiency of their home,” said California realtor Sherri Stoneberger. “If we have a home that has zero energy bills versus one that doesn’t, it’s a no-brainer that it will be sold first.”
In addition, an increasing number of buyers looking to purchase new homes are opting for solar-ready residences. We are currently working with a number of builders across the nation that are offering solar as a standard feature in all of their new homes and customers love it.
It’s another reason why owning is best; solar leases can complicate the sales process due to the lack of clarity on what a solar lease entails and how it affects home owners over the long-term. However, it’s easy for home owners to understand how owning a solar system cuts the cost of power by 50 percent plus adds to a home’s equity. This is just one of the reasons why so many of our home builder clients prefer to offer solar ownership on their new homes.
Return on Investment
As we know, cancellations and project stalls starting with the global economic crisis resulted in a global solar manufacturing oversupply that, in turn, led to a dramatic plunge in the price of solar panels since 2009. Over the past five years, the price for solar equipment has dropped 50 percent. Thus, solar is less expensive in today’s post-rebate world. And when you factor in the federal tax credit reduces 30 percent of the installation price, solar is very affordable – and in many cases is actually priced better than your utility on an average price per watt.
As the prices go down, the ROI for builders and homeowners goes up. This is significant, particularly since the price of solar continues to drop, as more communities offer solar as standard and customers come to expect it. It’s very easy for builders to tie affordability and savings back to consumers, who are starting to demand solar more and more. Thanks to great pricing and shorter paybacks, builders and homeowners in particular can reap all the benefits and long-term value by installing solar, without having to use third-party or leases.
“Residents of the top states in the (Geostellar Solar Index) can see their investment would be completely paid back in four to six years, and then receive free energy worth another five times that amount,” said Mark Wirt, a senior analyst with Geostellar, which publishes the quarterly index that analyzes the profitability of investing in rooftop solar in America.
Everyone knows that electricity rates aren’t getting any cheaper—another point that is easy to communicate with home buyers about owning vs leasing. As such, the ROI for a solar electric system will continue to grow as the electric companies continue to raise rates. When deciding on whether or not to invest in a solar electric system, homeowners usually want to see a comparison of the cost per kWh for solar vs. the price per kWh being paid to the electric company (this is an average in tiered rate structures). The great thing about solar electricity is that calculating costs and savings can be done on a per kWh unit basis using simple division. From there, it is very easy to demonstrate lifetime savings and payback time frames for each customer.
Though solar design professionals do have to take into consideration several factors to determine actual production and savings potential, it is important to remember that the historic electricity rate has been increasing at about 5 percent per year. In fact, Northern California just had an electricity rate adjustment on January 1, 2014, with another rate structure change planned for September. This is happening across the nation. In comparison, solar offers the advantage of a cheaper, locked-in price. Solar owners see the offset savings continue to grow as the AVG utility rate increases over time. Owners can lock in a utility rate for the life of the system and become energy independent.
More Benefits for Solar Customers
Using numbers to show some of the savings like the example mentioned above really help customers see how owning a solar system is significant on many levels. Here is another point to consider. “In much of the country, the Geostellar Solar Index shows that homeowners can actually generate more wealth with solar panels than stocks, bonds, CDs or other investments,” said David Levine, founder and CEO of Geostellar. “The index’s findings show residential solar power is not only viable, it’s a wise investment,” Levine noted.
According to the Geostellar Solar Index, in a total of 33 states, solar offers better returns on investment than 30-year U.S. Treasuries, which have a current yield of 3.7 percent. And in 43 states, solar offers better returns on investment than five-year certificates of deposit (CDs), which typically return just 0.75 percent annually.
“The wide spread between solar and conventional electricity in some markets has created broader opportunities for third-party financing and zero-money down offers, where institutions become co-investors with the homeowner, providing upfront money and participating in the yields,” Wirt said.
With leases there are no yields and customers lose a lot of the benefits like the tax credit and the short payback. Not to mention, they are locked into a 20-year agreement with minimal savings. This is significant, since purchasing a system now pencils out to about 50 percent less than leasing it over the long term. Recent reports show that the payback period of solar power systems is now as low as three years.
It’s expected that the prices will come down even more in the years to come. Photovoltaic manufacturing in the United States may also increase significantly in the coming years as technological innovations come about that will level the playing field with China. America’s economies of scale and supply chains have finally caught up and created a new reality: the price of solar has continued to drop steadily over the past six years with further declines anticipated. Leases and power purchase agreements were a great mechanism for the solar industry in the recession. Energy bills kept going up but loans and equity were not available, so it made perfect sense to lease then. It doesn’t make sense anymore.
Lead image: Panels on roof via Shutterstock