How To Make The Pitch That Owning Residential Solar Beats Leasing

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Effective energy policies, economies of scale and new technologies have achieved something remarkable.

Solar energy production is now at the scale and cost necessary so that it is affordable for everyone.

As prices drop and savings increase, it makes sense to invest in a solar power system rather than leasing one. The overall cost of purchasing a system now averages 50% less than leasing, with a payback period as low as three years. And with builders and developers offering standard solar systems in their new communities, the trend toward solar is expected to continue.

Even with many solar rebate programs administered by states and utilities evaporating or facing overhaul, the case for solar remains stronger than electric utilities in many areas where grid pricing rises 5% each year. The case for solar system installation is further backed by trends toward energy conservation, resulting in fewer solar panels needed and, subsequently, less installation cost for homeowners.

How deep is the energy conservation trend? A recent survey of 2,354 solar homeowners in the San Diego Gas & Electric territory revealed that 87% made a significant investment in energy conservation either before or after their solar system installation. This included replacing wasteful fixtures and appliances, improving wall insulation, weatherstripping windows and doors, and installing cool roofs. By matching conservation efforts with efficient solar systems, homeowners can look forward to a future of reduced energy costs, with builders vying for home buyer attention by ensuring these systems are already installed in their developments.

Financing favors ownership

Innovative financing options make the current solar landscape appealing – in particular, the inclusion of third-party power purchase agreements (PPAs) and leasing that have brought solar to the masses. These options are further enhanced by the significant reduction in price of solar systems and, in certain states, the offering of on-bill financing and property-assessed clean energy programs, giving homeowners a better value for their money.

“If the cost of rooftop panels is cheaper than what the retail rate of electricity is, there’s a savings on [the homeowner’s] bill every month, and it’s those savings that allow him to fully recover the investment,” says Robert Borlick, an independent energy consultant. He notes that while solar leasing companies do provide value to customers, the long-term savings are not as significant as those found with ownership.

Additionally, the cost of photovoltaic solar panels has plummeted by more than 97% since the Carter administration, fueling the drive to become an innovative and entrepreneurial industry within the economy. With such a drastic decline in pricing for solar PV, the picture becomes even clearer for the case toward ownership.

Homeowners who choose a solar lease or a PPA lose many of the benefits that purchasing the system provides, including the federal 30% investment tax credit, renewable energy credits and any local incentives. These incentives are forfeited in exchange for a low upfront or zero-down option. Even more, there are several examples calculating the total cost of a 20-year lease versus purchasing the system.

Comparing the cost of electricity with a leased system to one that is owned, it is clear that such an arrangement costs twice as much where electricity is concerned. Further compounding the cost is the annual escalator built into solar leases.

For example, the average utility rate in California is $0.20/kWh and will only increase in the future. Add an annual escalator – which acts like a compounding interest rate – of 2.99%. What does this look like in the long run? A solar lease that starts at $0.18/kWh with a 2.99% escalator will eventually reach $0.31/kWh at the end of the 20-year term.

However, with solar ownership, the $0.07/kWh to $0.08/kWh is fixed. The proof in the numbers concludes that owning solar provides homeowners with the cheapest electricity that is locked in, with all tax credits and rebates remaining with the homeowner whether the system is purchased or financed.

Cost-savings aside, there are many more considerations that make the decision to convert to solar electricity simple. This includes the ease of buying and reselling the systems, and overall return on investment (ROI) that could prove to be better than traditional investment vehicles such as stocks, bonds and certificates of deposit (CDs).

Buying and selling simplified

Solar leases are usually long-term, and typically allot for a 20-year term without the ability to buy out or pay off early. Though the monthly rate outlined in the lease agreement is usually slightly less than the existing monthly electricity bill, the resulting cost per kilowatt-hour with the lease payment is typically a higher amount than the calculated kilowatt-hour rate from purchasing the system. While seemingly complicated to calculate, it is much simpler to communicate the numbers associated with owning rather than leasing.

Once paid off, a solar power system can add tremendous resale value to a home. According to a 2013 survey conducted in California by Lawrence Berkeley National Laboratory, data collected from 2000 to 2009 pinpoints a defined trend of solar homes selling for a higher premium than non-solar homes statewide. The researchers concluded that each 1 kW increase in rooftop solar system size added $5,911 to a home’s resale value.

“Our analysis offers clear support that a premium exists in the marketplace; thus, PV systems have value, and their contribution to home values must be assessed,” the survey report states.

Pair this value-add with the increasing number of prospective home buyers who are opting for solar-ready residences. Many builders across the nation are already offering solar as a standard feature in all of their new homes, thereby increasing their attractiveness to buyers.

Another reason for considering why owning is better than leasing is that solar leases can complicate the sales process. This is due to the lack of clarity on what a solar lease entails and how it affects homeowners in the long run. However, it’s easy for homeowners to understand how solar system ownership cuts the cost of power by 50% and adds to home equity.

Return on investment

The dramatic plunge in the price of solar panels since 2009 is attributed to a global solar manufacturing oversupply. In turn, this has contributed to a drop in the price for solar equipment of 50%, making it less expensive in today’s post-rebate world. Factor in the federal tax credit that reduced the installation price 30%, and solar has become very affordable. In many cases, it is actually priced better than a utility on average price per watt.

As prices continue to drop, the ROI for builders and homeowners is rising. With this reduction in price, there is also an increase in customers who expect solar and new home communities that offer it as standard, allowing builders to tie affordability and savings back to consumers. And because of phenomenal pricing and shorter paybacks, both builders and homeowners can gather all the benefits and long-term value found with installing solar without having to resort to third parties or leases.

“Residents of the top states in the [Geostellar Solar Index] can see their investment would be completely paid back in four to six years, and then receive free energy worth another five times that amount,” says Mark Wirt, a senior analyst with Geostellar, publisher of the quarterly index that analyzes the profitability of investing in rooftop solar in the U.S.

Most people know that electricity rates aren’t getting any cheaper, making this an important point to communicate with home buyers about owning versus leasing. Because of this, the ROI for a solar electric system will continue growing as the electric companies continually raise rates.

To help homeowners decide on whether or not to invest in a solar electric system, a comparison of the cost per kilowatt-hour for solar versus the price per kilowatt-hour being paid to the electric company (this is an average in tiered rate structures) can be quite effective. On the plus side of this is that calculating costs and savings with solar can be done on a per kilowatt-hour unit basis using simple division. From there, demonstrating lifetime savings and payback time frames for each customer becomes very easy.

Though solar design professionals do have to take into consideration several factors to determine actual production and savings potential, it is important to remember that the historic electricity rate has been increasing. According to skyhighenergy.com, electricity increases on an average of 4% to 7% a year across the U.S. This means that a bill that is currently $200 a month could be as high as $300 within 10 years. By going solar, homeowners are locking in their rates and can see the offset savings continue to grow as the utility rate increases over time.

Solar generates wealth

Utilizing numbers to demonstrate the savings of solar ownership helps customers see how owning a solar system is significant on many levels, but there is another point to consider.

“In much of the country, the Geostellar Solar Index shows that homeowners can actually generate more wealth with solar panels than stocks, bonds, CDs or other investments,” says David Levine, founder and CEO of Geostellar. “The index’s findings show residential solar power is not only viable, it’s a wise investment.”

The Geostellar Solar Index indicates that, in a total of 33 states, solar offers better ROIs than 30-year U.S. Treasuries, which have a current yield of 3.7%. It also points out that in 43 states, solar offers better ROIs than five-year CDs, which typically return only 0.75% annually.

“The wide spread between solar and conventional electricity in some markets has created broader opportunities for third-party financing and zero money down offers, where institutions become co-investors with the homeowner, providing upfront money and participating in the yields,” Wirt says.

Leases, however, offer no yields, and customers lose many of the benefits like the tax credit and the short payback. Plus, they are locked into a 20-year agreement with minimal savings. This is significant, because purchasing a system now pencils out to about 50% less than leasing it over the long term. Recent reports demonstrate that the payback period of solar power systems is now as low as three years.

Effective policies, economies of scale and new technology have achieved something remarkable in recent years: Solar energy production is now at a scale and cost necessary so that it is affordable for everyone and a big piece of the energy puzzle. It is becoming part of the mainstream. Families, schools, hospitals and businesses are going solar in record numbers nationwide, even as incentives decrease.

Now that we’ve built this new energy economy, it’s critical that we keep the way clear for Americans to keep going solar. In the years to come, it is expected that prices will come down even further.

The manufacture of PV in the U.S. may also increase significantly in the coming years as new technological innovations level the playing field with China. Additionally, economies of scale and supply chains in the U.S. have caught up and caused the price of solar to continually drop over the past six years with further declines anticipated.

Leases and PPAs were an ideal solution for the solar sector in the recession, with energy bills continually going up but without accessible loans and equity. But with the advent of price drops throughout the industry, leasing just doesn’t make sense anymore.

Erin Clark is president of PetersenDean Solar in Fremont, CA, specializing in solar for new residential and commercial construction.