Solar PV: Own or Lease?

Solar leases and power purchase agreements (PPAs) have supercharged installation of residential photovoltaic (PV) energy systems in the U.S. At least this is the case in states such as Arizona, California, Colorado, Massachusetts, New York and others where energy industry regulators permit them to be offered.

Due to a variety of factors, including the scheduled ratcheting-down of the federal solar investment tax credit (ITC) at the end of 2016, U.S. solar energy finance-and-installation companies, such as market leader SolarCity, are increasingly turning to solar loans as a means of financing, however.

In two new reports, the U.S. Department of Energy's National Renewable Energy Laboratory (NREL) compares the costs and benefits of financing PV installations via third-party ownership (leases and PPAs) and direct ownership via solar loans and low-cost financing.

Financing solar PV: Loans or leases?

Comparing the total costs of alternative means of financing the installation of home and business PV systems, NREL energy analysts found that in general those who use low-cost financing to purchase their PV systems -- or do so by taking out solar loans -- can save as much as 30 percent compared to leasing them via third-party providers.

"Market interest rates on solar-specific loans currently range from 2 percent with special provisions to 8 percent," Travis Lowder, energy analyst and one of two co-authors of NREL's Banking on Solar: An Analysis of Banking Opportunities in the U.S. Distributed Photovoltaic Market, elaborated.

“Compare this to a weighted average cost of capital of 9 to 10 percent for third-party systems financed through tax equity investments. Using the lower cost rates provided by the loans could help to make solar power more affordable to more consumers, and more competitive with utility rates in more states."

According to this NREL report, which Lowder co-authored with NREL senior analyst David Feldman:

• The levelized cost of energy (LCOE) for residential systems with solar loans was lower than the LCOE for residential systems with power purchase agreements (PPAs) by 19-29 percent (varying by the term of the loan), because of the higher cost of capital necessary for the sponsor and tax equity in a PPA transaction;


• There are additional operational and financial risks associated with owning a solar asset, and many of the savings calculated depend on market environment and the specific situation of an individual homeowner or business. For example, changes in a homeowner's credit rating and the term of the loan can more than double the interest rate payments on the loan.

Solar financing among U.S. retail chains

In a second new NREL report, co-authors Feldman and Robert Margolis lay out and analyze the trade-offs between financing methods for businesses installing onsite PV systems. In To Own or Lease Solar: Understanding Commercial Retailers’ Decisions to Use Alternative Financing Models, Feldman and Margolis present case studies of PV financing strategies used by Ikea and Staples, both of which are leaders among U.S. businesses installing solar PV systems.

Ikea owns it PV systems, whereas Staples leases them via PPAs and third-party providers. Key takeaways from this report include:

• The LCOE (levelized cost of energy) for the modeled self-financed system is approximately 30 percent lower than the LCOE for the PPA-financed system, given a commercial customer's pre-tax discount rate of 10 percent; however the LCOEs are equivalent when the discount rate rises to 23 percent;


• Companies may view the risks of ownership differently than those for a PPA-financed system. If a company assumed a 10 percent pre-tax discount rate for a PPA versus a 23 percent pre-tax discount rate for self-financing, then the LCOE would be 14 percent lower using the PPA.

"The most appropriate PV financing option for a particular business depends on the characteristics and circumstances of that business. A company must work across its different business groups to decide what is most appropriate for its situation,” Feldman, a senior analyst at NREL, commented.

“With that said, if a company has less expensive sources of financing and is comfortable with the risks, it can often save on its energy bills by owning a PV system."

*Image credits: 1) Vivint Solar; 2, 3 & 4) NREL