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Until solar none of us have had the option to prepay for our electricity.  We simply get hooked up to the utility and then pay each month whatever the utility sends us in the mail.  And it’s rare that we’d sit down and calculate how much we ultimately spend on electricity.  But, here’s some quick math: if you have a monthly utility bill of $200, you’re spending $2,400 per year for electricity.  If that bill goes up by 3% per year (roughly the national average) you’ll be paying $2,485 next year, $2,570 the year after and so on.  Unless you make drastic cuts in your power use, in 10 years time you will have spent over $28,000 for your electricity.  Over 20 years you will have spent nearly $68,000.  And there’s that sinking feeling.  Almost as depressing as adding up your annual bar tab…I spent how much at Moe’s?!  

What solar power offers is the ability to pre-pay for your power and effectively locking in your price (leveraging what Southwest Airlines calls a fuel hedge – read more here).  It’s not fun to think about the investment, but it can be a savvy move that will be beneficial in the long run.  Here’s how:  

The average solar system costs in the range of $22,000 – $30,000, prior to financing charges – more on those in a minute.  So it turns out that buying solar costs less than what we’ll ultimately pay to the utility company.  Over the 25 to 30 year lifespan of a solar system it can cost half of what you would have paid to the utility.  Thus, the savings.  

Now, the challenge is that most of us don’t have $25,000 sitting around that we had saved up for power bills.  We’d been banking on paying as we go.  So how have over 2.5 million Americans afforded to install solar?  For the most part, not by handing over a stack of cash.    

Let’s dive into the three ways in which you can pay for solar: cash purchase, a solar loan, or with a solar lease/power purchase agreement.


This one we’ve touched on and it’s just as it sounds: you pull out a stack of bills from the crawl space and hand it to the solar installer once they’ve finished the job.  If you’ve contracted with an honest company you should be paying something in the range of $3.00 per watt.  So, if you get a 10,000 watt system (what would be called 10 kW system) you’d pay $30,000 – added benefit: in many states solar purchases are exempt from sales tax.  There are a few things that could make that price go up or down (size, complexity, battery storage, etc) but in general this is what you could expect to pay.  The benefit here is that you’re not borrowing any money, you’ll not have any payments for the solar system, and if it’s sized properly for your energy needs, you shouldn’t have but a small remaining connection fee to the utility.  Systems should last at least 25 years (length of most warranties) if not well over 30, so you’ve just saved yourself thousands of dollars in utility bills in the process.  In more specific terms, the payback period on most systems is around 7-8 years, so that cash investment will earn you a yearly rate of return of 12%-15%.         

A Solar Loan

The primary way in which people are purchasing solar these days is with a solar loan.  Again, this is a purchase so you are owning the solar system.  But, you’re taking out a loan to pay for its installation and avoid having to come up with any money (in most cases there are good $0 Down options available).  Solar loans have made ownership of solar accessible to so people that otherwise couldn’t afford it, and even with $0 down the loan payments are usually less than the equivalent utility bill, meaning that savings can be achieved from day 1.  But unfortunately there are some details that are less than ideal.  One very important thing to understand about the typical solar loan is that it is just an unsecured personal loan.  There are a handful of companies that have created versions of the unsecured personal loan specifically for the solar industry, but they are still the same thing and come with the same downsides.  Specifically, they come with high fees.  For the standard personal loan that you might take out for a home improvement project you’ll have to accept a high interest rate, often between 25%-30%.  This is where solar loans differ slightly.  They will come with very low interest rates to the borrower, often less than 2%, sometimes less than 1%, and therefore appear to be very low cost loans.  What isn’t obvious to the borrower is that a backend fee (typically called a “dealer fee”) is charged to the solar installation company.  And those fees can be as high as 30%.  So while the borrower isn’t directly charged a high interest rate, the solar installer or solar sales company is forced to increase their price for the solar system to account for this dealer fee.  A little industry dirt that you’re unlikely to hear from many people, and certainly won’t see in writing.  But it’s just how it works.  And this is why if you shopping for solar and considering financing options, you will receive a quote that gives an estimated monthly payment for solar.  Because the total price will be much higher than a cash purchase proposal – likely 25% higher, plus or minus depending on the financing option you choose.  But it’s not all doom and gloom.  The true benefit of a solar loan is that you’re able to get solar system for $0 out of pocket, you get to own the system (as opposed to a lease or PPA as we’ll discuss next), and in almost all cases you’ll have a loan payment that is less than the equivalent monthly utility bill and therefore you will save money from day one.  So just as with financing anything, you ultimately pay more for the product than if you had just paid cash.

Power Purchase Agreement (PPA) and Solar Leases 

Both a solar lease and a power purchase agreement are referred to as third party ownership (TPO).  And the way they work is in the name: they are owned by a third party, typically an investment group, who will own the solar system, cover the cost of installing and maintaining it, and simply charge the customer a fixed rate for the electricity (or a fixed monthly bill in the case of leases). Leases and PPAs work essentially the same way with just a few differences in the contract language.  In both cases you’ll lock in a set rate for electricity for 25 years.  That new solar rate will be less than the rate charged by your utility, usually a discount of 15%-20%.  Since the solar system is owned by the third party they are responsible for maintaining it, and will guarantee the customer some level of performance and production from the system.  Unfortunately, because they own it, the third party (and not the homeowner) will be the recipient of the solar investment tax credit, currently 30% of the system cost.  You can learn more about the tax credit here, but the gist is that any purchaser of a residential solar system is now eligible for a federal tax credit worth 30% of the purchase price of the solar system.  If you buy cash or finance you’ll get the tax credit.  If you sign up for a lease or PPA, you won’t.  That being said, for those who like the assurance of lifetime guarantees on performance, no maintenance and a fixed, discounted rate for electricity, the lease/PPA can be a great solution.  Not all states have approved of 3rd party ownership (sorry Florida) so you’ll want to confirm with your solar consultant what options are available to you.