Climate change is affecting us all in both domestic and business environments. Power costs have spiraled, and reliability and availability have decreased in many areas. Solar power is an obvious choice to supplement or replace the existing supply.
Before making the best purchase decision, the concerned buyer needs to understand the pros and cons of leasing or buying solar power and the main challenges they will face. This short article examines those questions.
Difference between Leasing vs Buying Solar Panels
First, understand the difference between buying and leasing.
Buying involves purchasing the solar panels for domestic or commercial use, using the buyers own or borrowed funds. The solar panels become the property of the purchaser after the funds are transferred.
Leasing is a contractual agreement between a company providing the solar installation (the lessor) to the company or individual acquiring the solar installation (the lessee) based on regular payments of lease rentals. While the lease is in force, ownership remains with the lessor, and depending on the agreement, ownership may pass to the lessee at the end of the lease period or may remain with the lessor.
As can be seen, leasing is more common in the commercial environment, and a straight purchase more common in the domestic one.
A final option that will defray operational costs and that can be attached to a purchase or lease is the Power Purchase Option (PPA). Basically, you sell any excess power generated by the solar array to a third party, usually the power company providing your mainline power. This will offset your mainline power costs, or perhaps even remove them entirely.
In the past, individuals were only able to buy, not lease. They were not allowed to construe lease agreements. This restriction has now largely gone away, but individuals are much more likely to purchase than to lease because they are not familiar with the lease concept. That, however is changing as vehicle leasing by savvy individuals is becoming more common.
The key to finding out whether leasing is better than buying is to find out the total cost of ownership over time usually the lease or loan period. That can then be reduced to a periodic, probably monthly cash flow to see what the regular cost of leasing is as compared to the regular cost of buying. Accountants will use phrases like “net present value” and “discounted cash flow,” but it’s quite simple. Choose the cheaper option.
The total cost calculation will also include other costs and benefits. Are tax credits available for one option only or both? Is there a balloon payment at the end of the lease? Insurance – is it included in the lease cost but not the purchase cost? Will installing solar panels increase your municipal taxes?
Remember that a solar installation is more than just solar panels. They need to be mounted, and the electricity generated reticulated to where it is to be used. There will be installation costs, regular maintenance and operational costs, and perhaps repair costs to be factored into the cost of ownership calculations.
A summary of the pros for each option is set out below. Bear in mind that state taxes will vary from state to state, so you need to investigate your tax options. Terms and conditions for state grants and loans will also change, so these need to be researched thoroughly.
When to Lease
• A solar lease is the better choice when you are being eco-friendly. In other words, you are more interested in in the environmental benefits than in the financial ones
• When you need to realize the financial benefits of solar immediately. You pay only a small down payment for the inception of the lease and see the benefits very quickly.
• A lease is also the better choice if you want to offload the responsibility of maintenance and repairs for a solar installation
• After investigation you may find that you are ineligible for federal or state investment tax credits
• You don’t want to wait until the end of the tax year to claim and receive the benefits of any tax credits
When to Buy
• You are keener on maximizing financial benefits than on environmental benefits
• You can lessen your federal and state taxes through federal investment tax credits
• When as a business, you can realize other tax benefits by depreciating the costs of the solar installation in your accounts
• You would like to increase the resale value of your home
• As always, the benefits are offset by the disadvantages
When Not to Lease
A major problem occurs if you try to sell your home before your lease is up. You either pay off the outstanding lease payments or persuade the new owner to take them over.
When Not to Buy
• Buying a solar power installation is a big investment which needs a significant payment up front. Most domestic users don’t have this in savings to spend as a lump sum. They will need a loan. The interest and other costs of the loan need to be factored into the total cost calculation
• There are other non-financial considerations to consider. The most crucial is can you install solar panels at all? Some municipalities need planning permission, a permit or specific installation requirements to do so because you are altering your home or business premises. Planning permission and permits take time to acquire. You might not be given permission or have your municipal taxes increased because you have improved the value of your home or business premises
• Tax credits can also be problematical. Your eligibility and their terms and conditions frequently alter, changing your financial case.
• If leasing, you will need legal advice to make sure that the terms and conditions, including the transfer of ownership and renewal arrangements are suitable
Having decided that you are about to step into a minefield, but are determined to press on with your solar panel plans, how do you choose between leasing and buying? Both are viable options and need careful consideration.
The first thing to do is to evaluate both options against your aims and objectives. Look at your financial situation and see how they compare. If necessary, most solar power companies will prepare quotations for both financial options which you can readily compare, and they will help you with the evaluation. In the end you will be that much closer to reducing your energy bill and increasing the value of your home or business premises.