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Clean Power solar-ownership-sensitivity-analysis

Published on October 23rd, 2012 | by John Farrell

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Residential Solar Lease vs Solar Ownership

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If you’re in one of the larger solar markets in the country (California, New Jersey, etc) then “going solar” doesn’t mean going it alone. You can likely get a “zero money down” lease or some similar financing tool to reduce the upfront cost. But is it worthwhile? The following analysis, done for a friend in Ithaca, NY, provides some context.

Solar Economics in Ithaca, NY

Comparing solar ownership to a solar lease can be tricky. The following analysis examines the value of owning a 5 kW solar PV system which can be used for comparison to a quote from a solar leasing company. Overall, long-term solar ownership can be very profitable.

The comparison can be done in two ways. The first examines the cash flow of two options for paying for your own solar array: with all cash upfront or with a bank loan at 5% interest. If you pay cash, you’ll be making money from day one, including all forecast maintenance costs. If paying off debt, it will cost extra until the loan can be paid off in approximately 5 years.

We’re not taking into account what are called the “opportunity costs” of the investment — that is, the return it could earn if put into other types of investments. Consumers rarely do this type of analysis, although businesses often do. We are also not including any tax deduction for the interest paid if the solar array were financed with a home equity loan.

The second common way to evaluate an investment is to examine its return. This can be used to compare it to other investments, like treasury securities, mutual funds, or stocks. As we can see, the cash investment has a good return over 15 years, and both solar financing options provide a good return over 25 years.

Financial Measures of Project Value

Finance Type Years to Payback 15-year ROI 25-year ROI Profit/Loss at 15 years Profit/Loss at 25 years
Cash 10 9% 12.50% $5,000 $16,050
Debt (80% of total cost) 18 n/a 7.50% ($2,400) $8,650

Neither of these analyses take into account the increased appreciation of the home because of having a solar array. A number of studies indicate that, when selling the home, one would get back a significant percentage of the installation value.

Comparison to Solar Leasing

Solar leasing offers several benefits over ownership, but also some potential liabilities. Benefits include no maintenance (yearly cleaning, potential inverter replacement, etc) and little to no upfront investment. But a solar lease should be examined closely and its assumptions compared to those in this analysis:

  • Projected Savings: How do projected savings compare to ownership?
  • Inflation Assumptions: A lease typically has two inflation rates, one for the lease payment (fixed) and one for the grid electricity price (a guess). If the latter ends up being lower than forecast (I’ve seen them as high as 5%!), it can significantly reduce projected savings.
  • Lease End: What happens when the lease expires? Can the system be purchased? How does the purchase price compare to the projected savings to that point? This is very important because of the potential value of the solar array to the resale price of the home. Also, one can inquire whether an inverter replacement had already been done when the system is available for purchase.
  • Company History: Will the company be around in 10-15 years to fulfill their lease requirements?

In summary, comparing ownership to leasing isn’t easy, but this guide can help by comparing the economics and challenging the assumptions of the lease agreement.

Assumptions for the Economics of Solar Ownership

Upfront Costs

Installed cost: $25,000
Combined incentives: $20,000
Total cost: $5,000

Ongoing Balance Sheet

Maintenance: $250 per year (including inverter replacement every 10-15 years)
Electricity savings: $838 in first year
Finance costs (if applicable): $2,600 per year for 10 years

Inflation, Financing, and Incentives

Estimated solar output: 5,776 kilowatt-hour per year for a 5 kW (DC) system
Estimated installed cost: $25,000 ($5 per Watt)
Federal incentive: 30% tax credit ($7,500)
State incentives: 25% tax credit on installed cost, up to $5,000; NYSERDA rebate of $1.50 per Watt ($7,500)
Electricity price inflation: 3% per year, starting at 14.5¢ per kilowatt-hour
Panel output decrease: 0.5% per year
Borrowing costs: 5% interest on 10-year, $20,000 loan. Largely paid back in year 2 with incentives.

Sensitivity Analysis

What happens if our assumptions are wrong? The following table compares the 15-year profitability of a PV system paid for with cash under different scenarios.

This post originally appeared on ILSR’s Energy Self-Reliant States blog.





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About the Author

directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.



  • Tyler Stroud

    Hi, my name is Tyler Stroud, I am working to develop content for a blog and would like to re-post this if possible. Please contact me at jt_stroud@hotmail.com if that would be acceptable, I would be happy to link back to the ILSR blog to help you boost traffic in return.

  • ronwint

    A solar lease is one of the absolute worst ways to finance the rental of a solar system. First of all you have to forfeit the 30% federal tax credit which is worth about $10,000.00 on a typical 6 kW system. You’ll also have to forfeit any cash rebate. The leasing companies will tell you that they will apply the tax credit and cash rebate to the system price so that you’ll lower the acquisition cost but the leasing company’s pricing is so over inflated that the tax credit and rebate as large as they are will hardly make a dent in their price.

    Instead of an expensive solar lease or PPA, consumers are now getting $0 down solar loans that require no equity, that offer tax deductible interest and allows you to keep the 30% federal tax credit and any other incentives and own your solar system for a much greater return on investment than any lease or PPA.

    And good luck ever selling your home with a lease attached to it. What homebuyer will want to assume your lease payments on a used system, when they can buy and own a new state of the art system for less than $3.15 a watt, installed, before incentives? Don’t take my word for it, search the Internet and you’ll find many articles concerning homeowners who are having difficulty selling because they have solar leases attached to their homes. Here’s a funny video that illustrates some of the potential pitfalls of a solar lease: http://vimeo.com/70888784

  • Ronald Brak

    Here in Australia, most people installing rooftop solar own a roof, which generally means they can borrow money at around 6% or so, using their home as equity. This means that to me it looks like most people would be better off buying a solar system outright rather than leasing. But still, a lot of these people will prefer to have a nothing down lease, even if in the long run they’d be better off buying, because of human psychology. According to the advertising I received in my South Australian letterbox, solar leasing will save me money from day one and I will be compensated if the system underperforms.

    • http://cleantechnica.com/ Zachary Shahan

      long-term thinking is apparently not a common human strength :D

  • Ronald Brak

    Five dollars a watt? Ouch! We average around $3 an installed watt in Australia, before any subsidy. But don’t worry, lower labour costs means US installation costs should eventually be less than in Australia.

  • jh1827

    the tax credits are applied to the contract amount which is total cost less the NYSERDA Incentive. NYSERDA Incentive is technically paid to the contractor/installer.

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