The following article was written by our CEO, Aaron Nitzkin and picked up by the local newspaper. Read on for informative points about financing solar:
You’re sitting at home, paying bills, catching up on life and your doorbell rings. Who could that be? Yikes, it is another one of those people selling solar telling you that you can go solar for free, with no money down, and save tens of thousands of dollars.
When it comes to financing solar, there is no “one size fits all” solution. There are many great options, but some of them are “less great” than others. If you make the wrong decision, you could wind up paying more for electricity over time versus if you had not gone solar in the first place.
To avoid the many common pitfalls, you need to do a little homework.
Cash vs. financing
The first question to ask yourself is whether you have cash to invest up front or not. Paying cash for a solar system makes a lot of sense. It provides you with a very predictable return on investment and cash flows.
With the price of solar declining so much over the past 10 years, you can expect to fully recoup your upfront costs in as little as five to 10 years with an internal rate of return of 15 to 25 percent. (Due to additional corporate incentives that are available, businesses can see an even faster payback.)
Compare this to the 7-to-10 percent maximum yield that you can get on riskier stock investments, and it’s understandable why some people view a solar system as a component of their investment portfolio — one that boasts minimal to no downside risk.
But not everyone has the cash or wants to deplete their rainy-day fund in order to go solar. For those folks, there are many options.
Ownership vs. third-party-owned solar
Demand for solar really skyrocketed with the introduction of third-party-owned solar systems. There are two primary vehicles for third-party-owned solar systems: leases and power purchase agreements (PPAs). These systems often require $0 down and provide homeowners with a fixed monthly payment.
They are also positioned as “solar-as-a-service” whereby the company that owns the solar system monitors the performance, guarantees the energy production, and also is responsible for all service and maintenance for the term of the agreement — often 20 years.
Third-party-owned solar systems are great for those who don’t pay taxes and can’t benefit from the 30-percent federal tax credit. They are also a good option for those who don’t want to deal with monitoring the system or inverter replacement or maintenance issues.
When evaluating a lease or PPA, it is critical to understand your options at the end of the agreement period or when you sell your house, the price per kilowatt hour you are locking in and whether there is an annual escalator or not. If there is an annual escalator, it can be as high as 2.9p percent, and you are betting that even with 2.9-percent annual increases in your per kWh rate, your lease payments will still be cheaper.
Unfortunately, while this may prove true, we are witnessing major changes in utility rate tiers and rate structures, so it is possible that with a high escalator, you theoretically could be paying more for your solar 15 or 20 years from now than you would have been had you not gone solar, even though it pencils well today.
Solar loans and PACE
While leases have been the dominant form of solar financing driving solar adoption, over the past couple of years, we have seen their market share decrease and the market share for solar loans increase. When I refer to solar loans, I am referring to specialty loans whereby you own your system often with $0 down and are able to generate a positive cash flow from day one. (In other words, your new utility bill plus your loan payment will be less than your old utility bill.)
Many of these loans require the borrower to have good credit.
PACE (Property Assessed Clean Energy) loans are slightly different from traditional solar loans in that they fund home-improvement projects and require a homeowner to have sufficient equity (usually at least 10 percent) in their home. The loan is then amortized over a set period up to 20 years and is paid back through property taxes.
Homework pays off
Finally, many solar companies have an agenda in that they can make significantly more money for certain financing options. It is critical to do your own homework, find someone you trust that can provide unbiased guidance, and make sure you select the financing option that best meets your needs.