Buy, Borrow or Lease?

Last week, I sketched a simple picture of the costs involved in installing a 3-kW system in San Francisco. This week, as promised, I’m taking a look at three different financing options. Here we go.

(1) Buy. Obviously, this is the most straightforward option. If you’ve got a enough cash to cover the upfront costs, which in our example are about $20,000, buying the system outright is probably the most hassle-free option out there. Bear in mind, however, there is a time-value to money, and there may be other investments that offer a more attractive return. (Like sending your kids to college…). Seriously though, if you could reliably earn 12 percent on the stock market, you’d be better off putting $5,000 down, taking out a loan with 8 percent interest and pocketing the difference. There are attendant risks to this approach, of course. And even then, some people with ample cash may choose to just buy the system outright and bypass the loan option altogether. I can’t really imagine wealthy Hollywood celebrities, for example, calculating (to the nearest cent) the internal rate of return of a PV system when they could be off riding jet skis and dodging paparazzi in St. Tropez. Anyway, I digress. Bottom line: most of us will either have to borrow or lease.

(2) Borrow. There are a number of different relevant ways to do this, though I’m going to avoid the details as what’s really important here is thinking about the numbers. The first is available through Energy Efficient Mortgages (EEMs). A second option is to borrow directly from your solar manufacturer or installer. Over the past year or so, a number of companies—including Akeena, Sunpower and Sharp—have teamed up with banks to offer equity lines of credit and/or loans with favorable terms for the purchase of PV panels. The third option is to apply for a renewable energy loan from your state or municipal government. Terms are typically as favorable (or more so) than the going market rate. Some governments even offer zero-interest loans for eligible borrowers. To learn about availability and terms, check out our interactive map of solar incentives. (For full details, visit the Database of State Incentives for Renewables and Efficiency website.)

PSE&G, a New Jersey utility, provides a simple (but really handy) loan worksheet (xls) for commercial customers. Residential customers will also find it useful. The spreadsheet provides a quick look at the net present value of a particular PV system, and lets you adjust the discount rate and the rate at which you expect to be able to sell net excess generation (NEG) back to your utility.

(3) Lease. This option is probably the most unique, at least in the realm of renewable energy. And recently it has been catching on. It works like this: you put some money down, typically around $2,000, and agree to a 10-year agreement. The company installs PV panels on your roof and promises to pay for any maintenance, as needed, including the eventual replacement of the inverter. You pay them a monthly rate for the electricity that’s produced by the panels. If it works correctly, everyone wins: the company receives enough money to earn a worth-while rate of return. And you pay a monthly fee that’s lower than what you’d been paying to your utility before the panels were installed. Pretty clever, eh? Awhile ago, I wrote a brief post about SolarCity, a California-based outfit that’s aiming to expand the lease approach. SunEdison is also active on this front.  

In the end, it makes sense that solar manufacturers, and others, should want to ease the burdens of financing. The easier and more attractive the loan options, the more PV panels will be sold. Stay tuned for more in-depth analysis of solar financing in the coming weeks.