How to pay for solar
There are four main ways to pay for solar:
Upfront
With a loan
With a power purchase agreement
With a lease
The way to see the most savings over the lifetime of your solar panels is to pay for the system upfront. This makes sense: you’re effectively paying today for all the electricity you’re going to need for the next 25 years or more, locking in your cost of electricity at a very low rate even when your utility increases prices. If you’re paying for solar upfront, it’s worth thinking about solar as an investment, and really focusing on your return on that investment (usually double-digit percentages) and the time it will take for the investment to pay for itself (5-10 years depending upon where you live).
The downside to this method of paying for solar is that you have to have a lot of cash on hand: solar installs have a high upfront cost, and many people would prefer not to pay for solar upfront. In fact, less than 10% of solar purchasers pay for the system upfront.
With that in mind, the most popular ways to pay for solar are with a bill replacement through a loan, a lease or a power purchase agreement (PPA). With each of these options, you should compare the cost of paying for solar with your current electricity bill. Is the monthly payment from your loan, lease or PPA less than what you currently pay for electricity? By how much? Will the monthly payment change overtime? If so, by how much? And for how long will you have to make those payments?
Here's what separates loans, leases and PPAs:
Solar loans are a form of purchasing your solar panel system. In other words, once you pay off your solar loan, your solar panels will keep producing free electricity until the end of their lifespan, which is around thirty years. Solar loans are like any other type of loan, so if you’ve taken out a mortgage or have a car payment, you’ll be familiar with the process. The main thing to look at with a solar loan is the length, the interest rate, and whether there are any upfront fees (like origination fees).
Solar leases are similar to loans in that instead of paying upfront for solar, you pay for a solar installation through a monthly payment. But there’s one key difference between leases and loans: with a lease, you don’t own the solar panel system. There can be advantages to having a third-party company own your solar panel system, since they’re on the hook for the performance, maintenance and any potential, if unlikely, warranty claims. On the flip side, you’re usually locked in to the lease for a pre-set term (typically 25 years), and once the term is up, you don’t necessarily get to keep the solar panels and the free energy production. When looking at solar leases, look at the monthly payment and any potential escalators that would increase your monthly payments over time.
Power purchase agreements, or PPAs, are similar to leases, in that someone else owns your solar panel system. But whereas with a lease you have a fixed monthly payment per year, with a lease, you are paying for the actual electricity produced by the panels on your roof, meaning your payments can fluctuate month to month. Generally, PPAs are offered at a discount to your existing electricity rate with an annual escalation rate.