A solar lease is a financial agreement where you pay a monthly fee to use solar panels that are installed on your property, but owned by the provider. The solar company who offers the lease assumes all upfront costs, and also ongoing costs like maintenance and repairs. In exchange, you agree to lease the photovoltaic (PV) system for a specified term, typically 15-25 years.
Leasing solar panels is an option for homeowners who want to avoid a large initial expense. Instead of paying thousands of pounds upfront, you pay a fixed monthly fee that is calculated to be lower than your electric bills. This also means you achieve net savings from the first month.
You can also install a solar PV system at zero upfront cost by taking a low-interest loan. However, the best loan conditions are only available for homeowners with a high credit score. Solar leases normally have higher monthly payments than solar loans, but they are less demanding with respect to your credit record.
How Does a Solar Lease Work?
In a solar lease, you sign a contract that charges you fixed monthly fees to use a solar energy system. You can use all the electricity generated by the solar panels, which is subtracted from your utility bills. The exact contract terms vary depending on the solar lease provider, but most of them have the following conditions:
- Solar leases have a financial penalty for early termination. However, some leases give you the option of buying the solar panels as a way to end the contract. If you move to another home, a solar lease can generally be transferred to the new owner.
- Most solar leases have a price escalator to compensate for inflation. Your savings increase over time as local electric tariffs become higher, but your monthly lease payments are also raised gradually.
The solar lease provider is responsible for all the costs associated with the photovoltaic system: solar equipment, parts, installation labour, financing, maintenance and repairs. If your solar system malfunctions during the term of the lease, the provider is responsible for fixing the issue. Lease providers will generally use a monitoring system to make sure your solar array is operating correctly at all times.
- Before signing a solar lease, you should take the time to read the contract carefully.
- The lease provider should be fully responsible for maintenance and repairs during the entire contract term. Otherwise, there is no point in paying a monthly fee.
You are responsible for using the solar panels properly, just like when renting a car. Solar lease providers take responsibility for any issues that occur when the photovoltaic system is being used normally. However, the client is held responsible for any damage caused by incorrect use.
Keep in mind that solar grants and other incentives are normally offered to the legal owner of a photovoltaic system. When you sign a solar lease, the system is owned by the provider and they get all the incentives.
What Is the Difference Between a Solar Lease and a Solar PPA?
A solar power purchase agreement (PPA) is very similar to a lease, since the provider assumes installation and maintenance costs while you agree to monthly payments. The main difference is how these payments are calculated:
- A solar lease has a fixed monthly payment, which increases by a fixed percentage each year (price escalator).
- A solar PPA has a kilowatt-hour price, and your monthly payment is calculated based on the electricity output of the solar panels.
In other words, a solar lease charges you for using the panels, while a solar PPA charges you for the electricity produced. The electricity price in a solar PPA is set lower than the electric tariff charged by your power company, which means you get savings from the first month.
Most solar PPA contracts also have a price escalator, which means the kilowatt-hour price increases over time. However, you will save on power bills as long as the PPA price remains below local electric tariffs.
A solar lease has predictable monthly payments, since you know the initial fee and the price escalator. On the other hand, solar PPA payments vary depending on the season and weather conditions. You can expect higher payments in summer, since solar panels generate more kilowatt-hours, and lower payments in winter when they are less productive.
What Is the Difference Between a Solar Lease and a Solar Loan?
Solar leases and loans both give you the option of installing a photovoltaic system for zero upfront cost. Part of your power bill savings are used to cover monthly payments, and the difference stays in your pocket as savings. However, when taking a loan you are actually purchasing the solar panels. Even if you owe money to a bank, they don’t own your system.
Being the owner of your solar panels is also an advantage if you decide to sell your home in the future. The photovoltaic system is part of your property, and not bound to a lease contract. You don’t have to worry about finding a buyer who is willing to assume the lease payments.
- Financing a solar panel system with a loan only makes sense if you can get low interest rates. This ensures that monthly power bill savings will be higher than loan payments.
- High-interest loans are not viable for financing solar panels, since interest payments can consume your payments completely.
Pros and Cons of a Solar Lease
Like in any purchase decision, a solar lease has advantages and disadvantages.
|Pros of a Solar Lease||Cons of a Solar Lease|
|1) You can install solar panels at zero upfront cost. The initial investment is replaced with fixed monthly payments.|
2) The solar lease provider is responsible for maintenance and repairs.
3) In general, you can qualify for a solar lease without having a high credit score.
4) Solar lease payments are calculated to be lower than your monthly electricity savings. In other words, the payments come from your savings and not from your pocket.
|1) Lease payments consume a large portion of your power bill savings. You can save more over time with a cash purchase or solar loan.|
2) You don’t own the solar panels directly, which means you miss out on incentives such as solar grants and feed-in tariffs.
3) Most solar leases have a hefty financial penalty for early termination.
4) Selling your home can be more difficult, since the new owner must be willing to take over the lease.
You will achieve the highest savings in the long run if you pay for your solar panels in cash, but this represents a major expense. According to the Department of Energy Security and Net Zero, UK homeowners can expect to pay £2,365 per kilowatt (kW) of solar capacity. This means a 4-kW rooftop solar system can cost you around £9,460.
If you have a high credit score, a solar loan will normally result in a lower monthly payment than a lease, which means your net savings are higher. You also own the solar panels outright, and you can claim solar tax benefits and other incentives.
With a cash purchase or a solar loan, the system provider is not responsible for ongoing maintenance. However, the best solar panels now come with a product warranty of up to 25 years, and solar installation companies offer their own workmanship warranties. You are responsible for keeping the solar panels clean, but malfunctions are covered by the manufacturer and the installation company.
Comparing the Solar Purchasing Options
If you’re a homeowner who is considering solar panels, there are four main purchasing options:
- Cash purchase
- Solar loan
- Solar lease
- Solar PPA
Considering the average solar installation price reported by the DESNZ, you can expect to pay £9,460 for a 4-kW home solar system. Here we compare how the four payment options would work in this case.
Keep in mind this is a very simple example. You can contact a professional solar installer to get an accurate quote and savings estimate.
Under favourable sunlight conditions, a 4-kW solar panel array can generate over 3,600 kWh per year. At an electricity price of 30 pence/kWh, this is equivalent to £1,080 in potential savings. If you pay for the solar panels in cash (£9,460), the payback period is 8.8 years.
The calculation above would apply for a homeowner who uses 100% of the electricity generated by solar panels. Most homeowners only consume a fraction of the solar panel output, and the rest is exported to the National Grid. Here is another savings estimate, assuming you use 50% of the energy generated, while exporting the remaining 50% at a tariff of 12 p/kWh:
- Energy savings = 1,800 kWh x £0.30/kWh = £540
- Grid exports = 1,800 kWh x £0.12/kWh = £216
- Energy savings + grid exports = £756
- Payback period = £9,460 / £756 = 12.5 years
While this may seem like a long time, consider that the best solar panels now come with a 25-40 year product warranty (much longer than the payback period).
If you get a solar loan at 4% annual interest with a 20-year term, the upfront cost of £9,460 is converted into 240 monthly payments of £57.33. You pay £688 per year, while the solar panels are saving £756 – £1,080. Your PV system yields £68 – £392 in net savings from year one, which means the payback period is essentially reduced to zero.
Solar loans become less viable if the interest rate is high. At 10% interest rate, the monthly payment in this example increases to £91, and annual payments add up to £1,092. At a higher interest rate, loan payments exceed energy savings and financing is no longer viable.
Generally, solar loans are an attractive option for homeowners with a high credit score and access to low interest rates.
Solar leases tend to have higher monthly payments than low-interest solar loans. For example, if the loan payment for a 4-kW solar system was £57.33, you might get a lease for £70/month. This means your annual lease payments add up to £840. This deal would be attractive for a homeowner who can save more than £840/year with solar panels.
If you cannot use all the electricity provided by a leased solar panel system, the difference goes to the grid at a reduced export tariff. To maximise the value of the electricity generated, you should ask the solar lease provider to size the system based on your actual consumption, avoiding excess generation which is less valuable.
Solar Power Purchase Agreement (PPA)
In a PPA, the solar panels also remain under the provider’s ownership. However, instead of a lease payment, you are charged a kWh price that is below local tariffs. For example, if you are currently paying 30 pence/kWh, you might find a lease provider who offers 24 pence/kWh.
- In this case, you pay £240 for every 1,000 kWh generated by the solar panels.
- You would pay £300 for every 1,000 kWh from the grid, which means you save £60.
If there is excess solar energy, it gets sent to the grid in exchange for an export tariff. Generally, the solar PPA provider will keep this extra income, since they own the PV system.
Solar leases and PPAs yield similar savings per year. The difference is that a solar lease charges you equal monthly payments, while a solar PPA charges variable payments based on electricity generation.
“Free” Solar Panels: Are They Really Free?
You may have seen online ads offering “free” solar panels. This is a marketing strategy used by some companies, and they are actually referring to solar leases and PPAs. While it is true that your upfront cost is zero, the concept of free solar panels is misleading, since you must sign a contract that involves monthly payments:
- You pay a fixed fee in a solar lease.
- You are charged for monthly electricity production in a solar PPA.
“Free” solar panels are not actually a scam, but the companies who make this offering are not being completely transparent. You will find many solar installers who are honest with their product offering and payment options.
Conclusion: Are Solar Leases Worth It?
When leasing solar panels, you avoid the upfront cost and pay a fixed monthly fee instead. The lease payment consumes a large fraction of your savings, but your out-of-pocket cost becomes zero and you get positive cash flow from the first month.
If you purchase your solar panel system in cash, you achieve the highest possible savings in the long run. The downside is having to pay over £7,000 at once, and waiting for 10 years or more before breaking even.
You can also install solar panels at zero upfront cost by taking a loan. If you can qualify for a low interest rate, a solar loan results in lower payments than a solar lease. However, leasing solar panels becomes a better option when you are only offered high interest rates.