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.

Selling your home

Perhaps one of the most common reasons to consider buying out a residential solar energy system lease before the contract expires is to make your home more attractive to potential buyers, says Vikram Aggarwal, CEO of EnergySage, an online solar marketplace created in 2013 with funding from the U.S. Department of Energy.

"In some cases, a new buyer may not want to take over the lease. So, you may just have to do it, buy out the contract," says Aggarwal. "In addition, if you know you're going to sell, owning the system makes it more enticing to buy the home. Owned systems add value to the home."

Increasing monthly lease payments

When signing on for a lease, it's important to read the fine print carefully. Often lease agreements include annual rate increases on those monthly payments you're making and over the course of 20 to 25 years, those annual increases add up.

"In the past, leases had aggressive escalation rates, while utility prices did not move up as fast," says Aggarwal. "This would cause lease payments to grow to be equal to or higher than electric utility costs."

If you find yourself in such a situation, your initial reaction may be to free yourself from the lease agreement, thus eliminating the monthly lease payments altogether. But that may not necessarily be the smartest move, as we're about to delve into.

Lease buyout options

When it comes to buying out a lease agreement, there's generally a few options. If you've leased from Sunrun, a company that pioneered the solar lease and solar power purchase agreement (PPA) structure back in 2007, the options include a cash buyout, or a full amount solar lease buyout. Each path has unique benefits and tradeoffs, as Wyatt Semanek, public relations manager for Sunrun, explains.

"Buying out a monthly solar lease with cash allows homeowners to own the system outright. Owning the system simplifies the process of selling the system to a new homeowner, if they decide to sell their home," says Semanek.

After a cash buyout, however, Sunrun would no longer maintain or monitor the system, and homeowners would lose Sunrun's system performance guarantee. Homeowners will be fully responsible for any repairs and maintenance their solar system needs outside of the scope of their home solar system's manufacturer warranty.

Yet another option is to simply pay all of the monthly lease payments for the entirety of the contract, up front. Under this scenario, at least in the case of Sunrun, the company would still continue to monitor and maintain the system.

"Prepaying your lease in full also simplifies the system transfer process to a new homeowner in the event of selling a home," says Semanek.

Consider the age of your solar energy system

If you're not seeking to make your home more attractive to potential buyers and instead plan to stay put for the long haul, there are some important questions to consider before proceeding with the type of lease buyout that does not include continued maintenance provided by the solar company.

Perhaps the most significant issue to research is the age and quality of your solar energy system. In particular, it's a good idea to find out the age of the solar panels and the system's inverter. If you have an older system, perhaps 10 years old or longer, then buying out the lease and potentially taking on the responsibility of maintenance yourself (depending on the company the panels were initially leased from and the language of that agreement) may not necessarily be a wise financial decision, says Aggarwal.

"If the system is 10-plus years old, you would have to evaluate the quality of the equipment," continues Aggarwal. "Old inverters need to be replaced around the 10-year mark. That cost can be $2,000 to $3,000 that you may have to spend."

The solar panels themselves are often under warranty and generally that warranty is longer than the one associated with an inverter, says Aggarwal. But even here, if you have to pay out of pocket for any solar panel repairs, or replace an aging panel entirely, the cost could be more than you can afford.

"If there's some maintenance required, having a lease that covers these costs may give you peace of mind," adds Aggarwal.

The bottom line on this issue? If you're considering a buyout, do your homework first. Make sure you understand how old the system is, as well as whether any part of the system is still covered by a warranty, and if so, how much longer will that warranty remain in place?

While you're at it, do your best to ascertain the quality of the solar system that was installed, as this too can help you develop a sense of what sort of maintenance costs you may be facing down the road. In order to research the quality of the system, identify the brand and model numbers of your solar panels, says Aggarwal.

The EnergySage website provides a quality ranking of newer solar panels, generally those that have been manufactured in the past four to five years.

Find out what the warranty covers

One more point on maintenance and warranties. If there still happens to be warranty coverage for any part of your residential solar energy system, you'll also want to get a sense of what the warranty pays for specifically.

"It's important to know if the warranty covers replacement equipment, as well as whether it covers replacement shipping," says Aggarwal. "And find out whether it includes replacement labor."

The answers to each of these questions will, of course, help you get a sense of how much you personally will be paying for any maintenance issues.

Crunch the numbers

Before making any major financial decision, it's always important to sit down and look at the numbers in black in white. In the case of a solar system lease buyout, you'll want to consider all of the questions that have been underscored here.

"If you're 10 years into your lease and you're looking to buy out the final 10 years, that may not the be best idea when you have 10- to 15-year-old technology," says Aggarwal.

The key takeaway is to review the economics of such an action from all angles, looking at the cost of all the remaining lease payments combined versus the premium you would pay to buy out the contract ahead of time, as well as such issues as the cost of maintenance should you take over upkeep of the system yourself.

As frustrating as certain elements of a solar energy system lease may be, in the end, you may find that it's simply too big a financial risk to take on the maintenance burden for that system.