How to finance a rooftop solar power system

I am not a financial advisor and I cannot give any financial advice. What follows is an overview of what options a home owner might typically have for financing their rooftop solar system.

I don’t usually advocate for the viewpoint that a rooftop solar system can lower your monthly bill. I see it more as an upgrade to the home that can be ‘cost effective’ while providing the home owner with options.

That said, a rooftop solar power system is, in essence, just a bunch of high tech gear that is designed and installed much like a new kitchen or bathroom (or even pool). There are many parallels to a kitchen remodel so I often compare the two.

At the end of the day, the solar power system has to be bought and paid for. Just like with kitchen remodels (and cars) the companies that install solar often have several options to help the customer finance the purchase.

Basically a home owner can pay cash, self finance, get a ‘solar’ loan, get a lease, or in the case of solar- a ‘power purchase agreement’ (PPA).

Cash- This one is fairly straight forward and possibly the ‘cheapest’ because there is no financing fees or interest to be paid. There is, however, the idea that the cash could be better used in other investments- and that gets really complicated.

Self Finance- From the solar company’s point of view, this is just like cash. The home owner finds their own financing such as a home equity loan or line of credit, personal loans from a bank/credit union, and even private loans (from family, etc.). This makes the transaction with the solar company a bit more straight forward but still exposes the home owner to potential finance and interest costs for their loan.

‘Solar loan’- while not an official term, this is what I uses to describe the loans that the solar companies have lined up for their customers. There are a few national lenders that provide loans specifically for rooftop solar power systems and they develop relationships with the solar installation companies to provide access to them. Similar to a mortgage, many ‘solar loans’ have an up-front fee associated with them- this fee can be quite significant.

In the mortgage world they call this fee ‘origination fees’ where in the solar world it is often called ‘dealer fees’. The subject is actually quite contentious- is that a fee the dealer is supposed to pay to the loan company or is that a fee the customer is supposed to pay? Regardless, that fee winds up on the bottom line cost to the home owner.

I guess one other way of looking at the ‘dealer fee’ is like looking at many gas stations that give a cash price and a credit card price because the credit card processor companies charge a transaction fee and the gas station essentially passes those costs onto their customers.

Bottom line, buyer-be-aware of potential fees related to financing when using financing provided by the solar company.

Lease- not much different than leases on cars- a company buys the system and installs it on your home and then ‘rents’ it to you (sort of). This is, to me, too complicated of a program for me to understand without significant study and therefore often an option that I don’t entertain.

My preference against leases doesn’t mean they aren’t right for certain people in certain situations- but I think there are two major things to understand if using a lease.

1. What is the impact of a lease on the investment tax credit? (Who gets to take the tax credit- the home owner -or- the finance company who bought the ‘clean energy’ system and is now leasing it to you?)
2. What happens if you sell the home? (This applies to loans, for sure- but in this case it might be significantly different)

Power Purchase Agreement (PPA)- A company buys and installs a solar power system and the home owner agrees to a (usually very long term) contract to produce their power from that solar power system from that company. The company owns and operates the solar power system- they essentially become a new/alternative utility company.

These can be very complicated contracts and the tax credits will go to the company the home owner. The transferability of the contract if the home is sold is also probably not as straight forward as the sales team might suggest. There are often clauses in the contracts that provide for rising agreed upon prices for the power over time- be on the look out for ‘escalator clauses'...

One major benefit of a PPA is the solar company has a lot more ‘skin in the game’ on the continuing upkeep and operation of the solar power system. If things go wrong with the system, they might be more motivated to respond quicker (maybe).

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In general, those are the different kinds of ways to finance a rooftop solar power system. Each has their advantages and disadvantages, and each home owner needs to weigh them for themselves.

For me, though, it seems that using cash or financing from my own banks/credit unions or home equity appear the best option because:

1. It reduces the ‘fancy footwork’ a solar company can introduce into the transaction because it removes any hidden ‘profit centers’ in the finance portion of the deal. (I might use a loan to buy a car- but I don’t use the dealership’s finance office to find a loan…)

2. It avoids the ‘dealer fee’ or ‘funding fee’ or whatever other ‘fees’ are called that are associated with many of the national lenders that solar companies often use.

3. It gives me full access to the tax credits.

4. It locks in my costs- a fixed rate loan for a fixed number of years with a fixed monthly payment means that, as long as the system produces all of my power, I can not only predict but also lock in my monthly cost for power for years into the future.

5. It allows me to build equity in the ownership of the solar power system (where leases and PPA’s build that ownership equity for someone else).

6. I can understand the nature of the impact on future sale of the home. If I sell my home, I know I can use proceeds of the home sale to pay off the solar power system and transfer it to new owners without finance company involvement. (Or I could pull all the equipment off and take it with me- while still paying on the loan). Leases and PPAs might be much more difficult…

All of that said- each person has their own preferences and situations that will require a unique approach to the financing of a rooftop solar system for their home. None of the above is meant as financial advice, I am certainly not qualified- please do your own due-diligence when selecting your financing options.

That said, if you are looking into a rooftop solar power system for your home or business, I have a book coming soon that is aimed at helping folks understand the solar marketplace so they don’t get taken advantage of when making a purchase. Click here to be notified when Tucson Solar Insider Desk Guide for Buying Solar is released.

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Curtis