Solar Financing Methods
A major barrier to solar installation is up front cost. Because of this, most people choose not to buy solar arrays for their homes. As a result, varous methods of financing solar projects have been used to incentivize homeowners and make solar more affordable. Some common options are outlined below and summarized in Table 2.
Table 2: Overview of financing methods (Microgrid Energy)
A cash purchase[i] is the financing method that pays off the fastest, as it requires just one initial investment. While desirable, this method comes with high up-front costs, making it less attractive for homeowners. This is the largest drawback to cash purchase. Homeowners or companies who have the capital will often choose to buy a system up front since there are no associated financing costs and the buyer has full ownership of model, as opposed to a third-party-owned method.
A minor drawback of self-financing methods is operations and maintenance (OM) cost. The individual will have to pay for OM since they own the system. However, statistical analysis[ii] done in 2017 by NREL indicates OM costs for PV systems are low, averaging about 1.1 cents/kWh produced.
The simulation in this report assumes cash purchase and all cost calculations were done under the assumption that the system is paid for up front with no additional financing costs.
Home Equity Loans
Since many homeowners are unable to purchase an entire system up front, many loan programs are available to aid initial system financing. Home equity loans (HEL) are the most commonly used self-financing method, aside from cash purchase.
The main drawback of HELs is the interest paid over time. The national average interest rate on HELs is 6.78%. For a $37,000 with a 20-year loan term (monthly payments), total interest costs amount to over $30,000. Actual values will vary according to loan policy, location, and homeowner credit rating, but this is a rough estimate of how much interest adds up, further barring homeowners from purchasing solar arrays.
In the case of both cash purchase and home equity loan financing, the solar array on a home will add value to it for the future.[iii]
Rather than buying and owning your own system, the power purchase agreement (PPA) model has a solar finance company purchase, install, and operate a system on a person’s property. The resident purchases 100% of the power generated by the solar array and pays a utility-competitive price to the solar finance company. The price of solar is agreed upon and remains constant (unless contract includes escalation factor), regardless of increase in utility cost.
In order for PPAs to be effective, there must be state incentives to make PPAs competitive with utility prices. Not all states even offer PPAs as an option to finance solar. Currently, the state of Missouri does not permit PPAs, though senate bills have been proposed while major corporations and organizations back them.[iv]
Solar leasing mimics the idea of a power purchase agreement, but rather than buying the energy, a homeowner pays a fixed amount each month to the solar financing company. The benefits and challenges are the same as those of the PPA model.
Local governments use property assessed clean energy (PACE) financing to fund renewable energy projects. In this model, a property is assessed and the local government imposes additional property tax, while a solar (or other energy efficiency/renewable energy/water conservation) project is installed with no up front cost.
The biggest challenge of PACE financing is its availability. Most states do not have established PACE programs yet. Additionally, there are high administrative costs associated with working directly with local governments. Sometimes, these costs are absorbed by the program, but occasionally homeowners will have to pay out of pocket.
[i] Speer, B. Residential Solar Photovoltaics: Comparison of Financing Benefits, Innovations, and Options. NREL,
[ii] Walker, A. PV O&M Cost Model and Cost Reduction. NREL, 2017.
[iii] Urlich, D. Paying for Solar – Tips for Financing a Residential Solar System. US Office of Energy Efficiency & Renewable Energy, 2016.
[iv] Uhlenhuth, K. Walmart, other companies back Missouri bill to allowe power purchase agreements. Energy News, 2017.