Shining a Light on Solar Financing: Choosing an Option That Benefits You and Your Community
Hey there, Northeast Solar family! In my last blog post, I wrote about living with and maintaining air source heat pumps — and how pairing them with solar can help offset the cost of running those heat pumps, thereby securing and maximizing your investment. Today, I want to talk about an often overlooked and confusing, yet crucial aspect of going solar – and one we have conversations about everyday with our clients — financing. While solar energy offers incredible benefits for your wallet, the environment, and our communities, it's important to understand the financial side of things, especially in the current market.
Keep Solar Local — The Northeast Solar Mantra
When it comes to making decisions about your energy needs, one of the most important factors to consider is where your hard-earned dollars are going. By choosing to invest in solar energy through a local provider and financing partner, you're not just making a smart financial decision for your household; you're also making a powerful choice to support the economic well-being of your community.
When you keep your energy dollars local by financing your solar system through a community bank or credit union, you're ensuring that your investment stays within your community, circulating through local businesses, supporting local jobs, and fostering economic resilience. This is where the economic multiplier effect comes into play. The economic multiplier refers to the increase in final income that results from an initial injection of spending into the economy. In other words, every dollar you spend locally can generate additional economic activity as that money moves through your community.
Studies have shown that the economic multiplier for local spending can range from 1.5 to 4 times the initial investment. This means that for every dollar you invest in your community, an additional $1.50 to $4.00 of economic activity is generated through increased local spending, job creation, and tax revenue. When you multiply this effect across an entire community, the impact can be truly transformative.
In contrast, when you send your energy dollars out of your community — whether through traditional utility bills or non-local financing options — that money leaves your local economy, never to return. This "leakage" of wealth can have a significant negative impact on your community over time, as it diverts resources away from local businesses, infrastructure, and services.
As a homeowner considering solar energy, you have a unique opportunity to make a choice that not only benefits your own bottom line but also strengthens the economic fabric of your community. By working with Northeast Solar and choosing a local financing option, you can ensure that your investment in clean energy also serves as an investment in the place you call home.
So, when you're weighing your solar financing options, ask yourself: where are my energy dollars going, and how can I maximize their impact on my community? By keeping your investment local, you can be a powerful force for positive change, helping to build a more resilient, sustainable, and prosperous future for yourself and your neighbors.
With rising interest rates, navigating solar financing can be more challenging than ever. That's why it's crucial to carefully consider your options and choose a financing partner that prioritizes your long-term financial success and the well-being of your local community. A good way to determine whether a lender has your interests and your community's interests in mind is if they have a local branch office that you can walk, bike or drive to; being able to talk with the loan officer in person is important to the process. If they don't, and your interactions are solely through internet links, electronic documents, or a solar salesperson waving an iPad in front of you, our advice is to slow down and do your research. Or better yet, call us. We can ensure that your process enlists and maximizes all the benefits of staying local.
The Solar Financing Decision Tree
When deciding how to pay for your solar system, there are several options to consider. Homeowners can choose between a cash purchase, home equity, solar loans, solar leases, and power purchase agreements (PPAs). We are going to review them all and provide you with the dollar and cents value for each one.
For the examples in this post, we'll use the following assumptions about the solar power plant we are financing. This system is our average in size, production, and cost. There are two significant incentives with solar — Net metering and Renewable Energy Credits (RECs). Both are calculated from the solar array’s production. Both are legislatively written into Massachusetts regulations.
- System size: 8 kW (8,000 watts)
- Initial cost before incentives: $24,000
- Electricity production: 8,500 kWh per year (Net Metering)
- Utility electric rate: $0.32 per kWh
- Annual utility rate increase: 2%
- Renewable Energy Credits $0.03 per kWh
Cash is King!
For homeowners with the financial means, paying for a solar system outright with cash offers a fantastic opportunity to maximize long-term savings and returns. Not everyone, of course, is in the position to do so, but by avoiding interest payments and loan fees, a cash purchase allows you to fully capitalize on the benefits of solar energy from day one.
The best way to evaluate the cash purchase option as an investment is to compare it to a 3.5% Certificate of Deposit (CD). A CD is a low-risk investment that provides a fixed rate of return over a set period, making it a useful benchmark for comparison. Solar, too, is a low-risk investment that also provides consistent returns.
Solar System Cash Purchase:
Net Cost After Tax Credits: $15,800
Total Benefits Over 10 Years: $32,333 (savings from electricity + RECs revenue)
Net Benefit Over 10 Years (Total Benefit minus Net Cost): $16,533
CD Investment Comparison:
Future Value of CD After 10 Years: $33,854
Total Cost of Electricity Over 10 Years (Without Solar): $29,783
Net Benefit from CD Investment After Accounting for Electricity Costs: $4,071
If you put your money in a CD, you’ll miss out on $12,462 in additional investment income. When evaluating the financial viability of solar investments compared to traditional financial instruments like Certificates of Deposit (CDs), it's crucial to consider the concept of “opportunity cost.” Opportunity cost represents the potential benefits one misses out on when choosing one alternative over another. The net benefit of the solar investment, which is $16,533.24, was derived from the total savings on electricity and revenues from Renewable Energy Credits (RECs), minus the initial cost after tax incentives. Conversely, the adjusted net benefit of investing in a CD, which totaled $4,071.13, was calculated by taking the future value of the CD (including accrued interest) and subtracting the cost of electricity that would have been saved by installing solar panels. Therefore, the opportunity cost of choosing solar over the CD investment amounted to $12,462.11, indicating a substantial financial gain from opting for solar.
The total 25-year net benefit from purchasing solar panels is $77,697. That is approximately $3,100 a year for 25 years on a $15,800 (after tax credits) initial investment. Not bad!
As the numbers show, a cash purchase of a solar system offers significantly higher returns compared to a CD investment over both 10-year and 25-year periods. The 10-year Internal Rate of Return (IRR) for a solar cash purchase is 15.16%, nearly five times higher than the 3.5% return of a CD. Over 25 years, the solar cash purchase IRR reached an impressive 20.38%, demonstrating the long-term value of investing in a solar installation.
It's important to note that these returns are based on the assumption of a 2% annual increase in electricity costs. If electricity rates rise faster than 2% per year, the IRR for a solar cash purchase would be even higher, making it an even more attractive investment opportunity.
Of course, a cash purchase does require a significant upfront investment, which, again, may not be feasible for all homeowners. However, for those with the financial means, a cash purchase offers a compelling investment opportunity with the potential for substantial long-term returns.
Use your Home’s Equity
Another attractive option for financing your solar system is a home equity loan. With rising housing prices, many homeowners have built up significant equity in their homes, making this a viable choice for those looking to invest in solar.
Home equity loans offer two key benefits: lower interest rates compared to many other financing options, and the potential for tax deductions on the interest paid. The interest you pay on a home equity loan may be tax-deductible, which can further increase your savings over the life of the loan.
For example, let's consider a home equity loan with the following parameters:
- Loan terms: 10 years at 6.5% APR
- Tax deduction: Assumes a 25% marginal tax rate
Now, let's run the numbers and see how a home equity loan stacks up against the other financing options:
Home Equity Loan:
- Loan terms: 10 years at 6.5% APR
- Net 25-Year Benefit (including tax deduction): Approximately $65,750.82
- Local Benefit: By using a home equity loan from a local bank or credit union, you can keep your investment within the community, supporting local financial institutions and economic growth.
- Ownership and Fees: With a home equity loan, you own your solar system outright. There are typically no hidden fees, and you can take advantage of all available tax credits and incentives in addition to the potential tax deduction on the loan interest.
It's important to note that home equity loans do come with some risks. By borrowing against the equity in your home, you are putting your home up as collateral. It's crucial to carefully consider your financial situation and ensure that you can comfortably afford the loan payments before pursuing this option.
While solar energy offers incredible benefits for your wallet, the environment, and our communities, it's important to understand the financial side of things, especially in the current market.
Be Wary of Dealer-Fee Unsecured Solar Loans
As the residential solar industry grows, many financing companies have entered the space, offering a variety of products to help homeowners go solar. Companies like GoodLeap, Mosaic, LightStream, and Sunnova offer unsecured solar loans, which allow homeowners to own their system with little or no upfront cost and often result in immediate monthly savings. They also enable homeowners to take advantage of valuable tax credits and incentives. However, it's important to recognize that these companies are not just in it for the environmental benefits — they also have a financial incentive to promote their own financial products, which may not always align with the best interests of the borrower.
When considering unsecured solar loans, it's essential to understand the key differences between options like credit union loans and dealer fee loans. While both can provide access to financing without requiring collateral, the terms, fees, and prepayment options can vary significantly.
One of the most significant advantages of choosing a credit union loan for your solar investment is the lack of hidden fees. Credit unions are member-owned, not-for-profit organizations that prioritize the financial well-being of their members. As a result, they often offer transparent, straightforward loan products without the high fees that can eat into your solar savings. When you finance your solar system through a credit union, you can be confident that you're getting a fair deal with clear terms and no surprises.
In contrast, dealer fee loans often come with substantial hidden costs that can significantly reduce the financial benefits of going solar. These loans, which third-party solar financing companies often promote, can include dealer fees that range from 20% to 40% of the total loan amount. These fees are often rolled into the loan itself, meaning that you're paying interest on them over the life of the loan. For example, on a $30,000 solar loan with a 20% dealer fee, you could be paying an additional $6,000 in fees, plus interest, over the course of the loan.
Another key difference between credit union loans and dealer fee loans is the prepayment option. With a credit union loan, you typically have the flexibility to pay off your loan early without incurring any additional fees or penalties. This means that if you have the financial means to pay off your solar investment sooner, you can save even more on interest and enjoy the full benefits of your energy savings.
On the other hand, with dealer fee loans, the high upfront fees are non-refundable, even if you pay off the loan early. This means that even if you have the ability to pay off your solar loan ahead of schedule, you won't be able to recoup the dealer fees you paid at the outset. This can significantly reduce the overall financial benefit of your solar investment and limit your flexibility in managing your finances.
When evaluating your solar financing options, it's important to look beyond the interest rate and consider the full impact of fees, prepayment options, and the long-term financial implications of your choice. By opting for a transparent, fee-free credit union loan, you can ensure that you're maximizing the financial benefits of your solar investment while also supporting a local, member-owned financial institution that has your best interests at heart. If a solar salesperson says they can approve you for a loan over the phone or on their iPad, ask them how much the dealer fees are. Don't agree on any financing until you have read all the fine print. If you are unsure, call us. At Northeast Solar, we're committed to helping our customers navigate the complex world of solar financing and make choices that align with their financial goals and values.
Understanding Solar Leases and Power Purchase Agreements (PPAs)
Solar leases and Power Purchase Agreements (PPAs) are two financing options that allow homeowners to go solar without the upfront costs of purchasing a system. With a solar lease, you make fixed monthly payments to a third-party owner in exchange for the right to use the solar panels and the energy they generate. Similarly, under a PPA, you agree to purchase the electricity generated by the solar panels at a predetermined rate, typically lower than your current utility rates. While these options can seem attractive due to the low initial costs, it's important to consider the long-term implications.
One key drawback of leases and PPAs is that you don't own the solar system, which means you miss out on valuable financial benefits like tax credits, incentives, and long-term energy savings. Additionally, lease and PPA contracts span 25 years and may include escalating payment terms that can erode the financial benefits over time. When selling your home, you may need to transfer the lease or PPA to the new buyer, or buy out the remainder of the contract, which can complicate the sale process.
Moreover, leases and PPAs often involve large, national companies that can siphon energy dollars out of our local economy, depriving our community of the economic benefits of your investment. When considering these options, weigh the short-term benefits against the long-term costs — and the lost opportunity to support your local economy.
At Northeast Solar, we prioritize ownership-based financing options, like credit union loans and home equity loans, that allow you to maximize the benefits of your solar investment while keeping your energy dollars local. By going solar with us, you can make a smart, sustainable choice that supports your long-term financial success and the well-being of your community. Our sales team will work with you to help you figure out the best way forward.
Now that we have covered the common solar financing options, let’s “run the numbers” and see how they stack up:
Local Credit Union Loan: Unsecured Loan
- Loan terms: 15 years at 9.13% APR. First year is interest-only, then re-amortized after applying the 30% federal tax credit
- Net 25-Year Benefit: Approximately $63,283.85
- Local Benefit: Financing through a local credit union keeps your investment and interest payments within the community, supporting local financial institutions and fostering economic growth.
- Ownership and Fees: With a local credit union loan, you own your solar system outright. There are no hidden fees, and you can take advantage of all available tax credits and incentives.
Dealer Fee Loan: GreenSky, Mosaic...Think internet solar loans.
-Loan terms: 15 years at 4.99% APR, 30% dealer fee. The first year is interest-only, and the loan is re-amortized after the tax credits are applied to pay down the principal.
- Net 25-Year Benefit: Approximately $59,616.07
- Local Benefit: While this option provides a long-term benefit, the high, upfront dealer fees can negate the federal tax credit benefit and divert a substantial portion of your investment out of the local economy. In the case of a dealer fee loan, where the fee is part of the upfront costs and not refundable upon early repayment, the dealer fee could be considered a “sunk cost,” because it's a cost that you have incurred and cannot get back — regardless of future actions.
Lease/PPA:
- Terms: 20-year lease with 2.9% annual escalator, no upfront cost
- Net 25-Year Benefit: Approximately $7,787.06
-Local Benefit: This option offers the least financial benefit over 25 years and keeps the least money in our local economy. Many of the financial benefits, like tax credits, go to the lease provider, who is not local.
- Drawbacks to Ownership and Selling Your Home: With a lease or PPA, you don't own your solar system — the leasing company does. This can create complications if you decide to sell your home, as potential buyers may be hesitant to take over a long-term lease. In some cases, you may need to buy out the remainder of your lease before selling, which can be costly. Trust us…it’s complicated!
Here is how the different financing options stack up financially:
That is a convincing graph. As you can see, the closer you spend your money at home, the better financially it is for you — and your community.
So, when you're considering solar financing, don't just think about your own bottom line — think, too, about the ripple effect your choice can have. By opting for local financing through a partner like Northeast Solar, you're not just saving money and reducing your carbon footprint; you're making a powerful investment in the place we all call home.
At Northeast Solar, we're committed to helping our customers navigate the complex world of solar financing. We believe that going solar should be a win-win for both your wallet and your community. That's why we partner with local credit unions and banks to offer financing options that prioritize your long-term financial success and the economic well-being of Western Massachusetts — part of our commitment towards building more sustainable communities.
If you have any questions about solar financing or want to learn more about how your solar journey can benefit both you and our community, give us a call or visit our website. Our knowledgeable and friendly team is always here to help you make an informed decision and guide you through every step of the process.
Remember, when you choose Northeast Solar, you're not just investing in clean energy — you're investing in a brighter, more sustainable future for yourself and your community.
Until next time, stay sunny!