New York State Homeowner’s Guide to Solar Leases, Loans, and Power Purchase Agreements

Homeowners-Guide-Solar-Lease-Loan-Power-Purchase-Agreements

Are you thinking about installing a New York solar electric system on your house and trying to figure out how to pay for it?
Solar electric systems are also known as solar photovoltaic or PV systems. Perhaps you are debating whether to purchase the system outright or take advantage of a financing option.
Perhaps you are still learning about the financing options available to you.
If you own a home and are thinking about going solar, there is good news. The price of a solar electric system has come down dramatically in recent years, and there are more ways to pay for it. But with so many solar financing options now available, the marketplace for these products has become increasingly complex. It can be hard to choose among the different packages and vendors. The differences between them may not be readily apparent.
Some contracts are filled with confusing technical jargon, and key terms can be buried in the fine print of a customer contract.

This guide is designed to help New York homeowners make informed decisions about financing New York solar.
This guide is designed to help New York homeowners make informed decisions and select the best option for your needs and finances. It describes three popular residential solar financing choices—leases, power purchase agreements or PPAs, and loans—and explains the advantages and disadvantages of each, as well as how they compare to a direct cash purchase. It attempts to clarify key solar financing terms and provides a list of questions you might consider before deciding if and how to proceed with installing a solar electric system. Finally, it provides a list of other resources to help you learn more about financing a solar electric system.
The guide does not cover technical considerations related to solar electric system siting, installation, and interconnection with the electricity grid, nor does it cover all of the particular local market considerations that may impact financing a solar electric system.

Financing Options for New York Homeowners
The size of a residential solar electric system installation can vary dramatically but is generally between 2 and 20 kilowatts (kW) depending on a variety of factors, including the available roof space (or ground space if it is a ground-mounted system); site conditions such as roof orientation, azimuth, and shading; the electricity usage of the home; and available financing. To put these system sizes into context, a 7-kW system in New York State produces enough electricity for an average New York household in a year.
A system’s size is also a key determinant of its cost. Although the price of systems varies considerably, a residential solar electric system usually costs between $15,000 and $35,000, roughly the same as a new car. But just as buying a car outright can be financially burdensome for many automobile customers, so too can paying upfront for a solar electric system. That’s where solar financing comes into play.

Financing innovations have helped fuel the exponential growth of the solar market in the United States.
Financing innovations have helped fuel the exponential growth of the solar market in the United States and fall into two broad categories based on ownership of the solar electric system: third-party ownership and homeowner ownership via a loan. A later section of this report explicitly compares the types of financing.

Some solar companies will arrange for the installation of a solar electric system and provide financing for it. These companies are often called full-service solar developers. In other cases, the installer is a different entity than the financial lender. A solar financing lender might be a bank, a solar company, a credit union, a public-private partnership, a green bank, or a utility.
Third-party ownership of residential solar electric systems allows homeowners to avoid high, upfront system costs and instead spread out their payments over time. It also often puts some or all of the responsibility for system operation and maintenance on the third-party owner. Currently, approximately 65 percent of homeowners in New York State who install solar take advantage of third-party ownership. The two most common third-party ownership arrangements are solar leases and power purchase agreements (PPAs).

Under a solar lease arrangement, a New York homeowner enters into a service contract to pay scheduled, pre-determined payments to a solar leasing company, which installs and owns the solar electric system on the homeowner’s property. The homeowner consumes electricity produced by the leased solar electric system; however, if the system provides excess electricity to the grid, the homeowner may get credit for that generation from the electrical utility. As with all types of solar financing options, under a solar lease arrangement the homeowner pays the regular utility rate for any electricity consumed beyond what credits the solar electric system generates through excess production sent onto the grid.

With a residential solar PPA, a homeowner contracts with a project developer who installs, owns, and operates a solar electric system on the homeowner’s site. The developer agrees to provide all of the electricity produced by the system to the homeowner at a fixed per-kilowatt-hour rate, typically competitive with the homeowner’s electric utility rate.
Loan financing is becoming another popular to way for homeowners to pay for solar. Similar to leases and PPAs, solar loans allow customers to spread the system’s cost over time, but they enable customers to retain ownership of the system, thereby repaying greater benefits over the lifetime of the system. Solar loans have the same basic structure as other kinds of loans and are being offered by an increasing number of lending institutions—from banks and credit unions to utilities, solar manufacturers, state green banks and financing programs, housing investment funds, and utilities. Unlike third-party solar ownership, a solar loan arrangement enables a customer to own a solar electric system outright and benefit directly from state and federal incentives. However, the customer also incurs the liabilities associated with ownership.

What You Need to Know about New York Solar Leases, PPAs, and Loans
First, you should be aware that solar purchase agreements, solar leases, power purchase agreements and solar loans are all legally binding documents. It is recommended that you have any agreement reviewed by an attorney with experience in the solar marketplace before you sign.

New York Solar Leases
A solar lease involves a scheduled payment, which is usually monthly. With a solar lease, a developer installs and owns the solar electric system on the home. In return, the homeowner pays a series of scheduled lease payments to the developer. A typical lease term is 15-20 years.
Because a lease agreement can deal with system maintenance in a variety of ways, it is important to clarify who is responsible for maintenance costs as a solar electric system may require maintenance or replacement of parts during the lease contract term. Most solar leases cover maintenance, but may not cover the cost of replacing equipment such as the inverter. One common option for the homeowner is to make a single payment toward operations and maintenance upfront. That approach could reduce the third-party owner’s incentive to provide good maintenance service. The maintenance risk can be reduced if the solar lease contains a minimum performance guarantee or the contract clearly states that operations and maintenance are covered by the third party. Such guarantees help ensure that the third-party owner properly maintains the system.
The benefits of a solar lease include elimination of most or all of the upfront cost of a system and, if indicated in the contract, transferring operations and maintenance responsibilities to a qualified third-party owner. Although homeowners who enter into a lease pay a set price for the equipment (and sometimes maintenance), they do not know for sure how much electricity the solar panels will produce, so cannot know exactly how much money they will save on their electric bills. Ideally, monthly electric bill savings will be greater than the lease payments, making for a cashpositive transaction. Many solar leases come with an escalating (meaning increasing) payment schedule, described in more detail below. Homeowners should thoroughly scrutinize escalating payment schedules when assessing the desirability of a particular lease.
The Solar Access to Public Capital (SAPC) working group, convened by the National Renewable Energy Laboratory, has developed a standardized solar lease template (https://financere.nrel.gov/finance/solar_securitization_public_capital_finance). This template can be modified to include different terms and has not been adopted by all solar developers. You should closely examine a solar lease contract before executing it or consider having a lawyer read it before you sign it because terms vary.

New York Solar Power Purchase Agreements (PPAs)
Under a New York residential solar PPA, a solar financing company buys, installs, and maintains a solar electric system on a homeowner’s property. The homeowner purchases the energy generated by the system on a per-kilowatthour basis through a long-term contract at rates competitive with the local retail electricity rate. This allows the homeowner to use solar energy at a prescribed per-kilowatt-hour rate while avoiding the upfront cost of the solar electric system and steering clear of system operations and maintenance responsibilities. Because the homeowner knows how much the solar electricity will cost for the entire term of the PPA, the homeowner is insulated from possible increases in utility electricity rates. However, it is also notable that if the electricity rates go down, the homeowner may lose some of the savings.
Ideally, a homeowner’s PPA per-kilowatt-hour payments will be less than the retail electricity rate, making the transaction cash-flow positive from day one. If you consider this option, you should look carefully at your electricity bill to see how your current rate compares with the rate proposed by the company offering the PPA. You can ask your contractor to calculate the projected per-kilowatt-hour rate and annual savings. For PPAs with an escalating rate, you should consider how any increase in local electricity rates would change your payment.

Visit https://financere.nrel.gov/finance/solar_securitization_public_capital_finance for a SAPC working group standardized PPA contract. As with all solar financing contracts, you should closely scrutinize a PPA contract before executing it or have a lawyer read it before you sign it because terms vary.

New York Solar Loans
Solar loans allow customers to borrow money from a lender or solar developer to install a solar electric system. With this approach, the homeowner owns the installed system. A wide variety of loan offerings are available with different monthly payment amounts, interest rates, lengths, credit requirements, and security mechanisms. Some solar loan products offer bundling of energy efficiency improvements along with the solar electric installation or allow for inclusion of roof replacement or energy-related improvements. Some loans require an asset to serve as collateral to secure the loan. When the lender takes a security interest in the solar customer’s home, it is called a home equity loan. Unsecured loans do not require an asset to collateralize the loan other than perhaps the solar electric system itself.
With many solar loans, the solar electric system can start saving the homeowner money right away by structuring the repayment terms so that the monthly loan payments are less than the resulting reduction in the amount on your home electricity bill. Alternatively, paying off the loan sooner and over a shorter duration may delay immediate positive cash flow, but will shorten the time needed to enter the post-loan period when monthly savings will be much greater.
Lenders for solar loans can be banks, credit unions, state programs, utilities, solar developers, or other private solar financing companies. In New York State, NYSERDA’s Green Jobs – Green New York loan program offers both a Smart Energy Loan and an On-Bill Recovery Loan. More information on the loans offered, as well as current interest rates, can be found at http://www.nyserda.ny.gov/All-Programs/Programs/NY-Sun/Customers/Solar-Financing-Options. Private loans that cover solar may also be available.