The Pros and Cons of Buying Out Your Residential Solar Energy System Lease
Installing a rooftop solar system is one of the most effective ways homeowners can proactively help address the worsening climate crisis. Generating energy from solar results in zero greenhouse gas emissions and zero environmental impact, which, to state the obvious, is a win-win for the planet.
Traditional fossil fuel energy, on the other hand, releases carbon dioxide and other greenhouse gases that trap heat in the Earth's atmosphere, making it one of the primary culprits in global warming, according to The United Nations. In addition, as various studies have shown, the fossil fuel industry has actively sought to spread misinformation about the realities of climate change, making it even more imperative to stop funding such a globally detrimental industry.
Homeowners who make the shift to rooftop solar often finance their systems with loans or pay out of pocket. After federal tax incentives, the average cost of a residential solar system in the United States ranges from about $17,000 to $24,000 for a typical sized system, according to EnergySage.
For those unable to afford this cost, leasing solar panels has historically provided another way to shift to a more eco-friendly energy source. Leasing is an arrangement that has some benefits and a variety of drawbacks.
On the upside, you will pay zero upfront to transition to solar, which for those who are cash-strapped is a huge benefit.
Instead, you'll sign a contract with a solar company that lasts as long as 20 to 25 years (making it one of the longest financial arrangements many consumers ever engage in, aside from a mortgage or student loan repayment.)
During the life of the lease, the homeowner pays a monthly fee to the solar provider. And in the best of worlds, that fee is cheaper than the monthly cost that would otherwise be paid to a traditional utility company, thus lowering your home energy bills.
However, in many cases, that monthly lease payment will increase annually, each and every year for the 20- or 25-year life of the contract. This is in contrast to having simply purchased your rooftop solar system outright with a loan, through which you would have one fixed, recurring monthly loan payment until the debt is paid off. After which, you're essentially generating free energy with your solar panel system.
And because you do not actually own the solar panels (the company you're leasing from owns the system) you forfeit all valuable tax benefits associated with making the switch to solar.
Most notably, you forfeit the investment tax credit (ITC), also known as the federal solar tax credit, which allows those who own their systems to deduct 26 percent of the cost of installing solar energy from federal taxes, according to EnergySage. For some homeowners, this credit translates into about $9,000 worth of savings.
Valuable state and local credits are also forfeited when you lease a solar energy system. As the EnergySage website explains, some states offer tax credits for installing a solar panel system, which function in much the same way as the federal ITC. When combined, the federal and state credits can translate into significant savings.
Finally, leasing solar panels instead of buying them outright can have an impact on the resale value of your home. Real estate agents from around the country have said during interviews that a leased solar panel system can deter potential buyers who don't want to have to pay the ongoing lease fee.
At least some of these considerations can make leasing solar panels a mixed bag, and may even prompt homeowners to wonder whether it's best to simply buy out their solar system lease long before the 20 to 25 years has elapsed. The goal of making such a move would be to free yourself of the agreement, and potentially even make your home more appealing to prospective buyers.
Whether such a move would make sense financially, however, is far from straightforward.
Here are some of the scenarios in which you might want to buy out your solar energy system lease before the contract has expired, as well as some of the pros and cons and questions to ask before making such a significant financial decision.