Resources > Solar financing basics

Solar financing basics

• Factsheet

June 4, 2024

When it comes time to pay for your new solar system there are a number of choices to make. Each option has pros and cons and it is important to balance what best meets your needs. There are a number of similarities to buying or financing a car, so if you’ve been through that process, a lot of this will feel familiar to you. In addition to financing, see what national or state incentives are available to you, especially the federal Investment Tax Credit (ITC).

For more in-depth information, please visit our Financing your new solar panels page.

Cash

The simplest method is to pay cash. Over the life of your system this will be the least expensive, but it will require a significant upfront investment. You will keep the federal tax credit and Solar Renewable Energy Credits (SRECs) (where applicable), but you’ll also be required to pay for any maintenance or repairs not covered by the warranties.

Pros

• Shortest payback period
• Maximizes money earned by your system
• 30% federal tax credit (ITC)
• State and local incentives
• SRECs

Cons

• Signifcant upfront costs
• Responsible for maintenance

Loans

If you prefer to finance the cost of your system there are several types of loans that will vary in their fees, total costs, and availability. These include home equity loans, home equity lines of credit (HELOC), state and federal programs, as well as credit union solar loans. For more on the specific types of loans, visit our main financing page.

Pros

• Less upfront cost
• Interest deductible for some types
• 30% federal tax credit (ITC)
• State and solar incentives
• SRECs

Cons

• Interest and fees will increase the payback period
• Responsible for maintenance
• Extra research and application time

Installer financing

Installer-based financers generally offer lower rates, but also charge higher finance or origination fees. Most of these options require credit scores of at least 640-650, but may have an easier application process since they are done through your solar installer.

Pros

• Easier process than other loans
• Less upfront cost
• Interest deductible for some types
• 30% federal tax credit (ITC)
• State and local incentives
• SRECs

Cons

• Interest and fees will increase the payback period
• Responsible for maintenance
• Higher fees than other loans

Below you’ll find a chart comparing a range of lenders, APRs, fees and final costs of different types of financing and term lengths to compare with a cash purchase of a $20,000 system. In the example below, it is assumed that you are eligible for the 30% Federal tax credit and that you apply that value to the balance of your loan in the first 18 months of the loan term. In the Dealer Financing examples, the dealer fees are included in the Total Cash Borrowing amount, but aren’t included in the 30% Tax Credit, which is calculated using only the cost of the system.

According to the IRS, “Miscellaneous expenses, including interest owed on financing, origination fees, and extended warranty expenses are not eligible expenses when calculating your tax credit.” For further information on rules from the IRS, see this notice. As always, consult your CPA or tax professional for guidance.

Here are some loan calculators that are free to use and can help you calculate the total interest on your loans:

• https://www.calculator.net/loan-calculator.html
• https://www.bankrate.com/loans/loan-calculator/

There is no perfect loan and ultimately the right choice for you will involve deciding what is most important for you:

• Lowest monthly payment
• Lowest dealer fee/origination fee
• Lowest amount of total interest paid

Third-party ownership

An alternative to loans or outright purchasing a system is a Third-Party Ownership (TPO) agreement. This is a financial option that allows homeowners to install a system on their roof, with minimal upfront costs. With this type of option, the homeowner does not own the equipment. TPOs are traditionally broken down into Power Purchase Agreements and Solar Leases, and while both options are used interchangeably, there are key distinctions which are addressed below.

Pros

• Little to no upfront costs
• No maintenance costs

Cons

• Long contract term can complicate home sale
• No 30% federal tax credit
• No SRECs

Power purchase agreements

Power Purchase Agreements, also known as PPAs, are a financial agreement between a homeowner and a company. PPAs are less widely available than leases because they aren’t permitted in all states. These long-term agreements range anywhere from 10 to 25 years. Under a PPA, the customer pays two separate electricity bills—one to the PPA provider (for the solar electricity) and one to their regular electric utility (for any extra electricity they have to purchase that isn’t produced by the system and any fixed costs on the utility bill). Upon the completion of a PPA, the customer has the option to extend the agreement, to buy the system from the company, or to have the system removed from their property.

Company: In a PPA, the company covers any expenses pertaining to the design, financing, permitting, and installation of the system at little to no cost to the homeowner.

The power generated by the solar system is sold to the homeowner, at a predetermined fixed rate. The fixed rate should be lower than the utility’s retail price, which is what incentivizes PPAs for the host customer. In order to account for inflation, rising market prices of electricity, and other external factors over the extended length of these contracts, the company will typically include an escalator which increases the lease rate or rate per kWh by select amounts annually. When reviewing your contract it is important to pay attention to the escalator rate and factor in the added cost over the life of the contract. You can also ask to have your agreement priced without the escalator to lock in the same fixed price over the entire term of the agreement.

The company is monetizing the electricity being sold to the host consumer, tax credits, and any potential Solar Renewable Energy Credits (SRECs) generated by the system.

Host customer: The property owner or host customer pays for their electricity first from the company’s array and then for any additional electricity that they need from their local utility. The host is not paying any install and related costs on the system, like the maintenance and upkeep costs during the term of the agreement.

Because they do not own the system, the host customer cannot claim any tax credits, SRECs, and related benefits the system will generate during the customer’s lease because those benefits belong to the system’s owner (the company).

Utility: The utility will continue to provide regular service to the host to allow for seamless, uninterrupted electricity. Where available across individual states or territories, the local utility will provide the benefits of Net Metering (NEM) to the host customer.

How a purchase power agreement works

Solar leases

Solar leases incur a fixed monthly charge. The customer is paying a monthly sum to the lease holder company, which is independent of the electricity produced by the system. In other words, you’re leasing the equipment and not the energy it produces. The monthly lease payment remains the same regardless of the season, time of year, or productivity of the system. The company, or leasing party, will determine this monthly rate after surveying the customer’s roof and determining the approximate annual production of the solar system.

Key distinction between PPAs and leases

Although both tools require zero down-payment and cover the upfront costs for the system, there is one major difference between both options.

In a PPA, a customer’s monthly payment is dependent on the system’s output and varies across the year. With a lease, however, the monthly payment fee remains uniform throughout the year. With a lease in particular, it is important to pay attention to a production guarantee and to see if you are still required to make payments if your system is not working and you are waiting on maintenance from the system owner.

General financing notes

While exploring any financing options around your solar installation, we recommend that you get multiple offers from various parties before making any formal commitments. You can evaluate the proposals based on what’s most important to you. Some of the variables you may want to consider include the following:

• Monthly payments (preference for smaller payments over a longer period)
• Amount of interest accrued or paid over length of contract
• Length of time for loan payback
• Any financing or miscellaneous fees stated in the contract. These fees are typically interest rate buydowns such as a 20% additional finance fee to lower an interest rate from 7.99% to 3.99%.
• Interest rate buydowns may be helpful if you are planning on making payments over a long period of time but will often cost you more money if you are planning on paying back your loan faster.

Key terms and concepts

Term Length: Leases and PPAs for residential solar customers are typically 20-25 years in length. This is in line with the guaranteed lifetime of the panels.

Annual escalator(s): Given the length of these contracts, factors like inflation and the market price of electricity will definitely increase over time. It is safe to assume that the company will include an escalator which increases the lease rate or rate per kWh by select amounts annually. This is usually expressed as a yearly percentage increase and it is important to understand how that will change your monthly bill over time.

Maintenance: Solar systems are fairly robust and low maintenance over their lifetime (25-30 years). In the event that something goes wrong or the panels break down, it is important to know who is responsible for maintenance or repair work and whether or not there is a cost to the customer.

In a PPA or Lease, it is important to know who will be responsible for regularly monitoring the system’s performance to ensure it is performing within the metrics and standards stipulated on the contract.

Production Guarantee: Some installers will offer a production guarantee that your system will produce a certain amount of energy within a certain time period. The specifics will vary from installer to installer, so it’s important to understand what the threshold is and how it’s spread out over time, as well as how they will fix the problem or compensate you in the event your system is underperforming.

Early purchasing of the system: For both a solar lease and a PPA, customers sometimes have the option to buy their systems instead of leasing the system for the full predefined contract term. While some contracts provide a predefined price for the system, others offer the option of soliciting the services of a third party appraiser and determining a fair value through them.

End of term options: Once a customer’s lease or PPA comes to an end, they have the option to buy the system from the third party, extend the agreement and negotiate new rates, or ask for the system’s removal from their property.

Moving: Whether you own your system, lease your system, or have a PPA, selling your home can add some complexity to your sale. Download our free guide to Selling Your Solar Home and get information to help.