New NREL study highlights benefits of solar loans vs solar leases & PPAs

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solar loan vs lease

Solar loans are gaining popularity as a solar financing option across the country. Because of the superior savings and similar benefits that solar loans promise, some industry analysts now predict that they will overtake third party-owned (TPO) solar leases and power purchase agreements (PPAs) as the dominant option for solar financing in the USA within a few years.

A new report from the National Renewable Energy Laboratory (NREL) examines this phenomenon and sheds more light on the possible advantages of financing your solar system with a loan as opposed to TPO solar lease / PPA.

The most important conclusion of the report is this: While going solar with either of these options is likely save you money on your electricity bills, financing your system with a solar loan could save you up to 30% more than if you go solar with a solar lease or PPA.

Key takeaways: Benefits of solar loans vs solar leases

  • Consumers increasingly have access to no-money-down solar loans. These loans can be secured with your home or unsecured. You can get these loans directly from banks or through solar installers. (Learn more about solar loans.)
  • Solar loans could end up displacing third party-owned (TPO) solar leases and power purchase agreements (PPAs) as the dominant form of solar energy system financing in the USA within a few years.
  • Depending on the loan term, financing your solar system with a solar loan could save you up to 45% off your electricity bills over a 20-year period. Going solar with a zero-down power purchase agreement (PPA) could save you around 22% off your power bills over the same period.
  • Two useful figures to look at when considering whether a solar lease or a solar loan is more appropriate for you are a) levelized cost of energy (LCOE) and b) cash flow. LCOE makes it easy to compare long-term savings from different financing options. Looking at the annual cashflow of a financing option will give you an idea of how much money you will be spending or saving on a yearly basis.
  • Depending on the term, a solar loan could offer lower monthly payments and greater long-term savings than a TPO solar lease or PPA system.

Financing a system with a solar loan means that you are the owner and therefore financially responsible for maintenance and repairs. Unlike with a PPA, your system has no clearly defined ‘production minimum’, and you will not be compensated for any lost electricity production if your system fails to perform as expected.

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Loan, lease or do nothing?

The report takes a look at the rapidly expanding solar loan market in the US (with a focus on California), examining loan products for both residential and commercial solar installations. Titled “Banking on Solar: An Analysis of Banking Opportunities in the US Distributed Photovoltaic Market”, it provides an overview of the relative benefits of going solar with a loan as opposed to going solar with a PPA – and compares both of these options to a ‘do nothing – save nothing’ scenario in which you continue paying your standard electricity bill.

But how do you compare the value of a lease/PPA – which is not an investment and therefore does not need to ‘pay for itself’ – to the value of a solar system you own? Levelized cost of energy (LCOE) and cash flow are two useful things to look at when comparing options, and to help you determine which solar financing option is best for you.

Levelized Cost of Energy (LCOE)

The metric frequently used in the electricity industry for this purpose is ‘levelized cost of energy’ (LCOE). LCOE allows you to understand how much you will pay on average per unit (kilowatt-hour or kWh) of electricity over a set period of time. It is therefore useful in making apples-to-apples comparisons of your options. To determine the LCOE of a given electricity option, you estimate how much money you will spend on electricity over a given period of time (in the case of the report, 20 years), and divide that by the total number of kWh’s you estimate you will have consumed in the same period. This will yield you a tidy dollar-per-kilowatt-hour ($/kWh) figure that is easy to compare across electricity sources.

The table below compares the LCOE for three durations of solar loans (5-year, 10-year and 20-year) to the LCOE for a 20-year solar PPA, as well as the LCOE for standard electricity bill payments to your utility over a 20-year period. As you can see, solar energy systems financed with loans generally have the lowest LCOE of all the options – and the shorter the loan term, the lower its LCOE is. For example, financing with a 5-year solar loan will save you approximately 4% more on your power bills than financing it with a 10-year loan, and about 12% more than financing with a 20-year loan. Nevertheless, financing with a 20-year loan will still save you up to 19% more than financing with a 20-year PPA.

Please note that figures in the table are indicative estimates only, and that you should look into the options are available to you before you make a decision. EnergySage’s Solar Marketplace can help you find and compare your solar loan options, as well as the installation companies who offer them.

Levelized Cost of Energy comparison

Figure ES-1. LCOE of residential PV systems, financed under a PPA or loan, compared to retail rates (from San Diego Gas & Electric). Source: NREL.

Cash flow

LCOE isn’t quite the whole story, however: A second big consideration that the report takes note of is cash flow. While the LCOE numbers above may give you an idea of how much you will pay for electricity on average over the course of 20 years, how your payments are distributed throughout that period will vary. As you can see in the table below, your electricity expenditures in the first 5 years would be highest with the 5-year loan. After the 5 years, of course, the solar electricity produced is virtually ‘free’ besides regular maintenance (including replacing the inverter after about 10 years). By contrast, a system financed with 10-year solar loan could deliver an immediate reduction in your electricity costs.

You’ll note that lines representing both the SDG&E rates (light blue) and the 20-year PPA (purple) rise gradually as time progresses, while loan payments are mostly flat until the loan is paid off. This is because contractual rates under a solar PPA will usually be subject to an ‘escalator’ of about 1-3% per year, and retail electricity rates are subject to ‘utility inflation‘ of around 4.5-5% per year. If a system is financed with a loan, on the other hand, the owner will be responsible for any maintenance that is required. The spike at the 10 year mark for all of the loans in the table below represents the costs associated with the replacement of an inverter.

Cashflow comparison - loan ppa residential elec tariff

Figure ES-2. Comparison of annual payment between residential PV systems, financed under a PPA or loan, and retail rates (San Diego Gas & Electric). The spikes at the 10-year mark, representing the cost of inverter replacement, do not apply for a PPA. Source: NREL.

Financial and operational risks:

Although purchasing a system with a solar loan will most likely save you more money over the long run, you should also be aware of certain risks associated with solar loans which don’t apply if you go solar with a solar lease or PPA. These risks can be divided into two categories: financial risks and operational risks.

The savings in the graphs above are dependent on certain assumptions about your financial situation, as well as how the system will perform over 20 years. One example of a financial risk is a change in your credit rating. A drop in your credit score during loan repayment could result in higher interest rates being applied to your loan, which will impact the amount of time it takes to pay it off.

Operational risks have to do with the performance of your solar energy system. Under a solar lease or PPA agreement, all maintenance and repair costs are the responsibility of the third party owner – not you. Solar leases and PPAs also usually come with guaranteed production minimums, and if the system produces less power than agreed in the contract, you will be reimbursed. By contrast, with a solar loan, you are the owner of the system, and therefore repairs and maintenance are your responsibility. In practice, this is not a major concern, as solar energy system components are fairly durable and come with robust warranties. But it is something that you should be aware of if you think that a solar loan is right for you.

For a more detailed analysis of solar leases & PPAs vs solar loans, see our article: Comparing solar loans vs solar leases.

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