The 5 Ways to Pay for Solar Panels
(And which 3 to avoid if you want to actually save money!)
There are five primary ways to pay for solar panels. And since Americans love options, it’s tempting to think all five ways probably have their own set of pros and cons.
The truth is, there are only two ways worth seriously considering for the vast majority of farms and rural businesses looking to install a solar panel system.
But we’ll take a look at all five options just so you’ll have the full picture. See if you can guess the three you should avoid like the plague, then read on to see if you got them all right.
How to pay for solar panels
Here’s the list of your five primary options for buying solar panels and producing your own renewable energy.
- Solar lease
- Solar financing
- Power purchase agreements (PPAs)
- Cash upfront
- Solar panel kits — installation is DIY
Make your guess — which two are economically viable and terrific options for any farm or rural small business looking to install solar panels? Let’s look at each solar payment plan in more detail to find out.
Solar leases
A solar lease is essentially a way to rent solar panels. The solar company installs the panels, the inverter, and all the other components of a solar power system. And then, they own it.
The panels are on your property, and you benefit from some of the energy and cost savings — to a point. But you pay the solar company fixed monthly payments regardless of how much power is generated. Some solar leases also have an escalation clause, because the term lengths are typically 20 years, and the “solar landlord” doesn’t want to be locked into one price for that long.
Solar leases seem attractive to people who can’t afford a big upfront cost. The problem is, you don’t get to benefit from the federal tax credit or other incentives. The solar companies get all that money.
And in months with little sun and less power production, you’re still paying the full price of the lease.
In the end, will you save money? Probably, but it won’t be much.
Solar loans
All the benefits of solar leases also come with solar loans. Here’s what you can look forward to when you finance solar panels:
- No large upfront cost
- A professional installs your solar panels
- Predictable monthly payments
- Renewable energy that helps the environment and costs less
But the difference between solar leasing and solar financing is in the money you save. Let’s take a closer look at the advantages of solar loans.
You own the solar panel system
With solar financing, you own your solar system outright once you finish your loan payments. Just like a car or a house. With solar leases, you never own it unless you decide to buy it — which will cost you even more.
You can also work to pay off a solar loan sooner by paying more than the minimum payment. That will save money on interest payments and reduce the amount of time until you recover your investment in your solar panels.
Interest rates for solar panels vary just like they do for other kinds of loans. So yes, things like your credit score and the size of the down payment play into it.
You get the tax credits
Even more important than the benefits of ownership — with a solar loan you can still claim the federal solar tax credit and any other tax incentives that may apply in your area.
Federal, state, and local tax credits, depending on where your farm or business operates along with other factors, can save you 30% to 60% — or even more — on your solar installation costs. Yes, it’s big money. We’re talking tens of thousands of dollars in cost savings. Especially if you can win a REAP grant, which is something only farms and rural businesses can apply for.
With solar financing, even if the only tax benefit you get is the federal one known as the investment tax credit (ITC), you will save 30% off your solar panel costs. Solar leases, on the other hand, can’t come close to making that 30% back. Not a chance.
So there’s just no reason to even consider a lease if solar panel financing is available in your state.
Get the difference? If you can’t afford the upfront costs of a solar panel installation, get a solar loan, not a solar lease. Don’t rent solar panels.
Power purchase agreements (PPAs)
Power purchase agreements offer another way to avoid the upfront costs of solar energy. The idea here is basically like getting a new utility company.
The solar company installs the panels and all the components, and like a solar lease, they own your solar system, not you. But unlike a lease, you don’t pay a fixed amount per month. You pay for whatever your solar power system generates, at an agreed upon per-kilowatt rate.
So the solar company essentially becomes your new power company, charging you for whatever energy your solar system produces. Any power you still need to draw from the grid, you’ll get from your traditional power company. So it will be like having two power bills.
It’s likely that your total cost will be lower with power purchase agreements compared to your normal utility company. So over time, you’ll save money.
However, your savings will not be nearly as much as if you owned your solar energy system outright. And with a PPA, like a solar lease, you also get no tax credit. The solar panel installer gets them all.
Cash upfront
The benefits of paying cash upfront for your solar panels would take many articles to fully explain, but here are the main ones:
You own it
By paying cash, you own your solar power system from the beginning. You pay no interest on a solar loan. You aren’t beholden to any other companies, or financing or lease terms that shackle your independence. You own it, and you reap all the financial rewards.
Higher resale value
If you ever decide to sell your farm or business, you get the maximum value from your solar panels in the resale. With a solar lease or even a solar loan, you have to transfer the remainder owed to the buyer. The buyer may like your solar panels and even love solar energy, but it will be a bit less attractive when they learn they have to assume the remainder of your loan.
Tax incentives
This one’s simple. You get them all. Any state or federal tax credits, including a REAP grant — you get all the money. Imagine spending $50,000 to install solar panels, but your tax credits and benefits end up saving you 50%. With cash payment, that $25,000 all comes back to you.
Defeat inflation
With upfront cash, you gain maximum advantage over inflation because your energy bill savings increase over time each time the utility company raises the rates. Besides the federal solar tax credit, this is the single best advantage of paying cash up front. Your savings will compound over time.
With solar financing, you still get some leverage over inflation, but the interest you’re paying on the solar loan reduces the net benefits. With solar leases and power purchase agreements, your agreement with the company that owns your solar panels prevents you from getting free from inflation, because they can raise your rates too, just like the utility does.
No recurring bills
With cash payment, you don’t have to make monthly payments to a bank or other third party. All you have is lower electric bills, for whatever energy you need that your solar panels don’t produce. Or, for months your solar panels produce more than you need – you pay nothing at all.
How does a zero power bill sound to you? By paying up front, you can have it.
Every benefit of solar energy is yours when you buy up front, and you’ll make back your investment over the next few years. The more tax incentives you can utilize, the sooner that will be.
Solar panel kits (Installation is DIY)
It’s a little sketchy to even include this one, because the idea of DIY (do it yourself) solar panel installation is laughable at best, and dangerously life-threatening at worst.
There’s a whole host of reasons for this — explained in-depth in this article about whether it’s wise to install your own solar panels. Short answer: It isn’t.
The only benefit offered by DIY solar kit peddlers is cost savings (other than the “pride” that you did it yourself — which doesn’t feel too good when you discover after trying to install them that you’re way over your head, and again years later when you find out you didn’t actually save any money).
The reality is, DIY solar panels cost more, not less, after you factor everything in. The main factor is that you don’t get the federal solar tax credit. That 30% credit is only awarded when a solar installation is done by a certified professional installer.
Why? Because installing solar panels is HARD. And when done poorly (assuming no one gets hurt), your solar system will generate far less energy than it otherwise would have. That lost solar power means lost savings.
Will your DIY solar panels cost 30% less than paying someone else to do it? Not likely.
And it doesn’t stop there. Beyond the tax credits, you lose more money because your solar panels likely won’t produce as much solar energy as they should when you do it yourself. And, you lose months and months of time scratching your head through all the installation and permitting processes, when a pro would have had it all done in less than a month, in most cases. Again, if you need more convincing, click the link above and read the article.
Bottom line: DIY solar installation kits are the worst option of the five. By far. They have not a single advantage in their favor.
Other inferior ways to pay for solar panels
Just so no one insists there are more than five ways to pay for solar energy systems, yes, this is America, and we could probably come up with dozens of creative options. But most of them are variations on what you’ve already seen, especially the endlessly creative financing options available.
Personal loans
You could get a personal loan. But personal loans typically have higher interest rates and less favorable terms than a typical solar loan secured through a bank or credit union that offers solar panel financing.
Home equity loans
Another option is a home equity loan. But now you’re biting into your home’s equity. While you might get better interest rates with a home equity loan compared to a personal loan, it’s still not the optimal way to finance solar panels.
There are banks that work with solar companies and have developed solar panel loans specifically for the solar industry. It’s great to do your homework, and if you want to explore home equity loans and hope for better interest rates and lower monthly payments, you are free to do so.
But at the end of the day, you’re likely to get the best solar loans through your solar installer and the banks they work with.
Did you get both of the best options right?
When it comes to purchasing solar panels for your farm or rural business, the best options for how to pay for solar come down to two:
Pay cash up front or finance solar panels
All the other options range from dreadful to just not as good of a deal.
As you saw, the clear number one reason these two are the best is the tax incentives. You want the tax incentives. Who would want to miss out on the tens of thousands of dollars sitting there waiting for you from the federal solar tax credit and any other incentives you qualify for?
But besides that, none of the other options have anything in their favor that isn’t also true with financing solar panels or paying cash up front. If you can’t afford the big upfront payment, then finance it. That’s a better option than solar leasing or the convolution of a PPA.
A note about the REAP grant
Because Ag Solar specializes in solar panel installation for farms and rural businesses, it’s worth noting how much of an impact the REAP grant can have on your costs of installing solar panels.
Only farms and rural businesses can apply for a REAP.
And, businesses and farms typically install larger systems. That means greater long-term savings, but also greater upfront costs. With the REAP grant, you can slash those costs in half, or even more than half.
At the time of this writing, Ag Solar has won over $10 million in grants for our customers through the USDA REAP program. And though we usually talk about the grant, there is also a REAP loan that gives you more solar financing options. The terms of a REAP loan are much more favorable than what you’ll get from a bank.
When you combine a REAP grant with the federal solar tax credit, you can realistically expect to save over 50% on your solar panels. We’ve had clients recover all their installation costs in just a few years by taking advantage of these opportunities.
Read this detailed introduction to how the REAP works, how to apply, who is eligible, and more.
Ready to talk about installing solar panels for your farm or business?
If you’re looking into solar power systems and you have a farm or rural business, contact Ag Solar and have our certified team of professional installers and consultants come out to talk about it, make the plan, and start enjoying big energy bill savings.
