Solar leases: What to know before you sign

If you want to go solar but aren’t sure how to pay for it, signing a solar lease may sound enticing. Solar leases cover the costs of installing a solar energy system and help lower your electric bills, but they can cause more trouble than they’re worth—which is why it’s important to do your research before signing any contract. 

Whether you should sign a solar lease contract depends on your specific financial circumstances, but generally, it’s a better financial decision to take out a solar loan if you don’t have the cash to pay for panels upfront. 

“In the right situation, solar leases can be a good way to help lower your electric bill,” said Spencer Fields, Former Director of Insights at EnergySage. “They allow you to go solar without putting any money down, reducing your monthly energy bills on day one and providing peace of mind around any future warranty or maintenance needs. But it's important to do your research and go into any lease agreement with open eyes. Specifically, look out for the escalation rate and see if you can get it as close to 0% per year as possible."

You can think of a solar lease like a car lease: It’s a form of third-party ownership (TPO) where you don’t own the product that you’re paying for. Under a solar lease, this third-party owner (e.g., a solar company) installs solar panels on your property and then sells you the electricity produced at a predetermined monthly rate. Companies calculate this rate based on the estimated annual production of your solar panel system and include this rate in your contract. Your lease will also have a fixed term length, typically 20 to 25 years.

In most cases, your solar company will allow you to buy the system outright at its market value price at the end of your contract, but you’ll likely get stuck paying additional fees—which means it’s not the best financial choice for owning your solar panel system. Similarly, if you want to get out of your lease early, you’ll be on the hook for expensive early termination fees that negate the savings of going solar in the first place.

Solar leases vs. power purchase agreements

You've probably heard the terms solar leases and power purchase agreements (PPAs) used interchangeably. While similar, the critical difference is that with a solar lease, you'll have a fixed monthly payment, whereas with a solar PPA, you'll purchase the power generated by your system at a fixed price per kilowatt-hour (kWh).

Essentially, the key difference between a solar lease and a PPA is that with a solar lease, your monthly payments are predictable and stay the same over the lifetime of your contract. With a PPA, your monthly payment will vary depending on how much electricity you use. If a consistent monthly payment is more helpful for your budget, a lease makes more sense for you than a PPA.

However, if anything goes wrong with your system, you could be stuck paying for power you’re not receiving with a solar lease.

Solar leases vs. solar loans

Solar leases and solar loans are similar in that they both offer zero down payment options, which means you don’t need to have thousands of dollars saved up to go solar. Here’s where they differ: 

• Ownership: You maintain ownership of your solar panel system with a solar loan, but you don’t with a solar lease. Owning your panels with a solar loan means that you can take advantage of rebates and incentives upon installation. With a solar lease, the system's owner is the solar company, so they receive financial incentives instead. For this reason (and others), lifetime savings with a solar loan are usually higher than those with a solar lease.

• Maintenance: If you choose a solar lease or PPA, the leasing company owns the solar panel system and typically offers a service program to cover any maintenance issues that arise during the lease term. However, solar leasing companies often drag their feet or can be hard to get ahold of if you need any repairs or maintenance, which can cause headaches for you as a homeowner. On the other hand, if you take out a solar loan to purchase your system, you’ll be responsible for its maintenance. In either case, solar is a generally low-maintenance power source, and the equipment you buy with your solar loan should have warranties that range from 10 to 25 years.

• Monthly payments: Payment terms differ slightly between leases and loans. In a loan agreement, you usually have a fixed monthly amount due. With solar leases, payments typically increase over time (generally around 1-3% annually). An annual escalator is another essential thing to look out for in a solar lease. These are becoming less common, but if included, they’ll increase your monthly payment by a preset rate over your term length (typically 1-5% each year).

As with any solar financing option, solar leasing comes with its share of pros and cons:

Top pros and cons of solar leases

Pros of solar leases

Cons of solar leases

Top solar lease companies in the U.S.: What's the difference?

We don’t usually recommend financing your solar panels with a solar lease. Paying for your solar panels in cash will save you the most money, and loans are the next best option. Power purchase agreements are generally the most favorable choice if you don’t want to own your system. But, a lease is still an option if you want relatively stable monthly payments.

There are major downsides to solar leases, though. You’re ineligible for federal or state solar tax credits, which save you thousands of dollars if you take out a solar loan instead. Generally speaking, if you can afford the monthly payments for a solar lease, you can likely afford the payments for a solar loan too, and you’ll own your solar panels at the end of your contract.

Even though current interest rates are higher than a few years ago, it’s still better to own your panels through a loan if you can.