You've heard it before: "Solar panels save you money! They practically pay for themselves!" But when you look at the various payment options and costs associated with the installation and maintenance of your solar panel system, you may start to wonder to yourself, "This looks an awful lot like spending money? When and where do the savings kick in, if ever?"
For starters, the claims are true. Installing a solar panel system in your home does save you money; however, the level of savings can vary across financing options and are dependent upon the tax incentives available. Before you can start saving money through your solar panel system, you'll need to do some research, have some money saved, and be patient.
We can help you with the research:
Different States, Different Savings
In addition to a 30% federal tax credit, which deducts 30% of your solar system's cost from your tax bill, owing a solar system can also entitle you to other tax incentives or cash rebates depending on which state you live in. Some states offer massive tax incentives or cash rebates that can alleviate the huge financial burden a solar system can create; meanwhile, other states offer few incentives beyond the federal tax credit. For a complete breakdown of the different states and their solar incentives, CLICK HERE.
State Tax Credits: As a homeowner or business owner, you will be able to deduct some of the cost of your solar system from your tax bill.
The Solar Renewable Energy Credit (SREC): An SREC is a solar credit that is issued each time a solar panel system produced 1,000 kilowatt hours (kWh) of electricity. This credit can then be traded or sold to utility companies that are required to maintain a certain percentage of clean energy; in short, they are paying you to give them credit for the energy produced by your solar system.
Cash Rebates: Available for a limited time after installation of your solar system, cash rebates can reduce the cost of your system by up to 20%.
Savings by Purchasing Option
As we discussed in an earlier post about the various financing options available to you, choosing the "best" financing option for you is contingent upon how much money you're willing to pay upfront, your credit score, and how soon you want to see a return on your investment. Not all financing options are created equal; When it comes to overall savings, each payment option carries certain advantages as well as disadvantages. Similarly, not all solar companies are created equal; some offer fewer purchasing options and deliver higher returns, while others have better interest rates but longer contracts. For a full list of available solar companies, their purchasing options, and other important information, check out our company reviews.
The Long Haul: Buying the System Outright
Let's say you purchase a new solar panel system completely out-of-pocket. At the very least, you will automatically qualify for a 30% federal tax credit, meaning your can deduct 30% of your system's cost from your annual tax bill. And depending on the state you live in, you could also qualify for state tax credits, cash rebates, or SRECs. In short, these incentives can greatly reduce the initial cost for individuals looking to purchase an entire system. Purchasing a solar system outright also means you no longer have to worry about your monthly electric bill. So not only are you not paying for electricity, but you are also receiving anywhere between a 10% and 30% additional return on your investment. Within a few years, your system will have paid for itself; your savings, meanwhile, could be worth over double your initial investment.
The Middle Ground: Financing with a Solar Loan
Unlike paying for the whole system out-of-pocket, you might also consider financing through a solar loan. With a solar loan, you will make monthly loan payments instead of paying a monthly electric bill. While monthly loan payments tend to be higher than the monthly lease or PPA payments, they can occasionally be lower than the monthly electric bill you would otherwise be paying. So already, you will see immediate savings through a solar loan. And as financing through a solar loan qualifies you for the same tax incentives, credits, and rebates as though you were purchasing the system outright, you will be entitled to additional savings that could yield a higher return in the long run. Of course, this is greatly dependent upon where you live, as tax incentives and rebates will vary state to state. And unlike leases or PPAs, solar loan interest rates are fixed, meaning you will not be charged greater interest from year to year.
The Short Gain: Financing with a Solar Lease or Power Purchase Agreement (PPA)
Solar leases and PPAs generally offer less savings than either an outright purchase or a solar loan, and are the best financing options under the following conditions:
- You lack the cash required to make a complete purchase or finance through a loan.
- You are less concerned with maximizing the long-term financial benefits associated with your system.
- You don't want to pay for maintenance, repairs, etc.
- You have a credit score of at least 700.
Let's say you qualify for a solar lease or PPA. You can expect your monthly payments to be considerably lower than your monthly electric bill, so you can start saving immediately; and as electricity becomes more expensive over time, your savings will increase from year to year. Not being the owner of the solar system has both its advantages and disadvantages: on the one hand, you will not have to pay any money in repairs, maintenance, or replacement parts, which saves you money; on the other hand, any tax credits, cash rebates, or other incentives will be absorbed by the company that owns the system. Interest on a solar lease can increase 3% to 4% a year, and in the case of a power purchase agreement, you are essentially paying for the electricity your system generates, albeit at a lower flat rate than a traditional electric bill.
Regardless of how you finance your solar system, you will find plenty of savings; however, don't expect each purchasing option to yield the same results. Be sure to evaluate your own needs, means, and expectations before you do business with a solar company. Sometimes, a little extra research can save you thousands of dollars.