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The New Yorker’s Guide to Going Solar

Ownership vs. Leasing

Solar-powered homes are an increasingly common sight across New York State and the country as a whole. In the past ten years, residential solar has experienced a boom unlike ever before in the United States. In 2010, 660 MW (DC) of residential solar capacity had been installed; by 2019, that capacity had increased over two-thousand fold to 15,850 MW (DC). What’s more, this tremendous growth in residential solar represents only a fraction of the total solar power installed — there has been a similar boom in commercial installations and utility-scale solar farms.

This boom is being driven mostly at the state level. Nearly every state has a clean energy program, and New York is a leader among them. Governor Cuomo’s energy initiative, Reforming the Energy Vision (REV), has committed the state to meeting seventy percent of its energy needs with renewables by 2030, and one hundred percent by 2045. Residential solar occupies a key role in this plan, and to promote it, New York offers generous incentives to help residents embrace clean power. Solar companies from across the country compete to help residents take advantage of solar energy.

The solar products on the market today — ranging from solar ownership, solar leases, and Power Purchase Agreements (PPAs) — are designed to help you go solar with the lowest barriers to entry. Which one is most suitable for your circumstances? This guide will help you understand the differences so you can pick the option that’s right for you.

Solar 101

Should you Own or Lease?

Solar ownership is a relatively recent phenomenon in New York. In the past, solar financing wasn’t as common as it is today, so owning your solar system entailed significant upfront investment. While the federal and state tax incentives would effectively reimburse a major portion of that cost for eligible taxpayers, the upfront cost was still formidable enough to dissuade many homeowners from buying their solar system outright.

Once your solar system is switched on, the photovoltaic cells will produce electricity during the daytime to offset your usage. For most systems without a backup battery, the solar power will backfeed the electrical grid, and the utility will credit your account for the kilowatt-hour (kWh). The kilowatt-hours you produce are deducted from the kilowatt-hours you use, and the utility will only charge you for the difference. Therefore, your solar system produces immediate savings the moment it’s activated.

New York utility companies have various costs associated with generating electricity and delivering it to your home. Like most things, these costs can increase over time, due to fluctuations in energy markets, infrastructure repairs after a storm, or simply inflation. These costs are passed on to consumers and are billed per kilowatt-hour. As solar customers are given a credit for every kilowatt-hour produced, these rate increases would only apply to your energy consumption in excess of your solar energy produced. Residential electricity rates in the US have increased 52% since 2001 when the Energy Information Agency (EIA) began gathering detailed records. For comparison, inflation during that same time period was only 45.8% and real wage growth overall has stagnated. Your utility bills increase over the last two decades compared to wages is quite a gap and is showing no signs of slowing for residential customers nationwide.

Like many capital improvements to your home, a solar system adds resale value to the property if and when you decide to move. A 2015 study sponsored by the Department of Energy found that solar systems added a premium to home values; this was corroborated by a study by Zillow in 2019, which found that solar homes in the NYC metropolitan area sell for 5.4% more on average compared to conventional homes.

When you own your system completely, you would have no legal obstacle (such as a lien) when selling your home. However, if you are financing a solar purchase, the lender may place a UCC fixture filing on the system until the loan is satisfied, although some loans are transferable.

The federal Investment Tax Credit (ITC), which offsets 26% of the project in 2020, only applies to the owner of the system. New York State provides an additional tax credit, which is capped at $5,000. The most direct way to take advantage of these credits is through purchasing your solar system, whether in cash or via financing. Eligibility for the federal and state tax incentives is contingent on income taxes retained by the respective governments — you’ll want to consult your tax preparer to determine if they would apply to you.

This had been the primary reason many homeowners didn’t own their system before financing options existed. While government incentives significantly reduced the real cost of going solar, homeowners were traditionally on the hook to pay for it upfront. As private lenders and state governments developed financing options (such as NY-Sun in New York), homeowners gained the option to own their system with little to no upfront cost.

This had been the primary reason many homeowners didn’t own their system before financing options existed. While government incentives significantly reduced the real cost of going solar, homeowners were traditionally on the hook to pay for it upfront. As private lenders and state governments developed financing options (such as NY-Sun in New York), homeowners gained the option to own their system with little to no upfront cost.

Solar leasing became popular in the early 2010s with growing public support for environmental causes amidst concern about climate change. Many homeowners were looking for a low-cost way to offset their household’s carbon emissions, and solar leasing companies stepped in to bridge the gap.

Whether you own or lease a system, the solar energy produced still backfeeds the grid and will reduce your net kilowatt-hour consumption. The utility would only charge you for kilowatt-hours used in excess of your solar output. Many solar leasing companies would cover the roof with panels to maximize your potential solar output, and you would pay them a monthly fee instead of the utility bill.

Solar leases were very popular early on as the only option to go solar without a large upfront investment. The solar company would install the system at no charge, allowing you to reduce your carbon footprint and utility bill immediately. Solar leasing customers would instead pay a smaller monthly fee to the solar company to rent the system.

With a solar loan the payments on the system end when it is paid for. With a solar lease they end when the term expires (typically 25 years). When factoring in the escalator the total lifetime payments you make with a lease or PPA will typically be 200-400% more than a loan for the same solar system. While this is often still less than what you would have paid the utility it is substantially more than a typical solar loan.

Similar to when you own a solar system, the utility’s rate increases would only pertain to household electricity consumption in excess of your solar output. Note: this protection is offset by the escalation clause common in solar leases, which allows the lease payment to increase by typically 2.9% per year.

As the solar company remains the owner of the system throughout the terms of the lease — which can be from 15 to 25 years — they will put a lien on the system to protect their investment. This can be an obstacle if and when you sell your home. Typically, you’d have the option of buying out the lease, which often exceeds the cost of remaining payments, or you could ask your prospective buyer to try qualifying for the lease.

Solar leases typically include escalation clauses that permit them to increase the lease payment by a percentage per year — typically 2.9%. While net metering protects you from utility rate increases, this is largely offset by the escalation clause. In fact, if the utility rates don’t increase this fast, you could end up with a leasing payment that increases faster than the electricity bills would have.

The federal ITC benefits the owner of the system, and the solar company retains ownership. Therefore, the reimbursement of a portion of the cost goes to them. Lessor’s will not be able to take advantage of that benefit. In 2020 the ITC covers 26% of the cost of a solar project. The New York State Solar Tax Credit can be used by both owners and lessors of the system.

Many solar leasing companies promote maintenance packages, but the circumstances in which they’d be required to honor them are often more limited than the normal manufacturer warranty for faulty equipment (chiefly panels and inverters). Direct damage to the equipment is usually covered by homeowner’s insurance. Therefore most maintenance packages come at limited cost to the company, and provide very little additional protections to the homeowner.

While homes with solar tend to sell well due to their reduced electric bills, a complex legal arrangement with a solar leasing company can scare off home buyers. This relates to the lien against the property, which can impede future refinancing, as well as the prospective buyer entering a long-term agreement they can’t negotiate. In some cases, this can result in negotiations against the value of the home.

panels on your roof instead of the utility. The homeowner agrees to buy only the solar energy produced. Therefore, during the winter months when the solar system produces the least, your payments would be lower than in the summer, when the system produces the most.

In most other respects, PPAs and solar leases are very similar, so the same advantages and disadvantages apply. The advantages include going green, no upfront expense, and some protection against utility rate increases.

The disadvantages include the solar company’s lien on the system, issues with transferability, a potential decrease in home value, and an escalation clause that would offset some of the protection against rate hikes.

For both solar leases and PPAs, homeowners should carefully review the contract to determine the escalator clause won’t increase their payments above anticipated utility hikes, so they can remain cash-positive throughout the 20-25 year contract.

Solar Ownership vs. Solar Leases/PPAs

All solar options mentioned above can help you save on your electricity bills while offsetting a substantial portion of your household carbon emissions. The amount of savings will vary based on your current electrical usage, the suitability of your home for a solar system, and the agreement you reach with your contractor.

Solar leases/PPAs have the potential to reduce your monthly expenses in the short term. However, solar leases/PPAs typically have escalator clauses, which in some cases might overtake the increases you’d otherwise pay on your electric bill. These payments would increase annually throughout the duration of the lease.

Solar financing payments are fixed throughout the loan. As electric rates increase over time, your savings would increase, and once the loan was paid off, your solar energy would effectively be free. Therefore, solar ownership typically yields considerably higher savings compared to solar leases over the same time period.

In the past few years, solar ownership options have become more popular than solar leases, primarily due to savings, simplicity, and transferability. However, they largely depend on eligibility for federal and state incentives designed to reduce the real cost. If a homeowner is ineligible due to not paying enough income taxes, and they still want to save on their electric bill, a solar lease can be a good alternative if you find the right contractor.

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