Solar lease vs. buy ROI methodology

The four ownership structures

Cash purchase

The homeowner pays the full installed cost upfront and owns the system from day one. All incentives — state income tax credits, SREC revenue, any remaining federal credits, and property tax exemptions — accrue to the homeowner. Cash purchase produces the highest 25-year NPV in almost every scenario where the payback period is shorter than the analysis horizon, because there is no financing cost eroding returns. The tradeoff is obvious: upfront capital requirement of $20,000–$45,000 for a typical residential system.

Solar loan (secured and unsecured)

The homeowner borrows to buy the system and owns it. State incentives and SREC revenue stay with the homeowner — this is the critical difference from lease and PPA structures. Secured loans (HELOC, home equity loan) carry lower interest rates and HELOC interest may be deductible under IRC §163(h)(3)(B) when proceeds are used for home improvement. Unsecured solar loans (GoodLeap, Mosaic, Sunlight Financial) carry higher rates — typically 5–9% — but require no home equity and do not encumber title the way a PACE loan does.

Solar lease

The homeowner pays a fixed monthly payment to a third-party installer who owns the system. The installer captures all tax incentives and SREC revenue — not the homeowner. The homeowner receives a lower electricity bill but not the economic upside of system ownership. Leases run 20–25 years with escalation clauses of 0–2.9% per year on the monthly payment (per EnergySage Solar Marketplace data). End-of-term options typically include system purchase at fair market value, removal, or a lease extension. Leased systems can complicate home sales: the buyer must either assume the lease or the seller must pay to buy it out or have it removed.

Power Purchase Agreement (PPA)

A PPA is similar to a lease in ownership structure — the installer owns the system — but pricing differs: instead of a fixed monthly payment, the homeowner pays per kilowatt-hour (kWh) of electricity produced, at a rate typically 10–30% below the local utility rate. The per-kWh rate usually carries its own escalation clause. Like a lease, the installer captures all state incentives and SREC revenue. PPA structures are particularly common in states with favorable solar resources where the production guarantee makes the per-kWh pricing model less risky for both parties.

The NPV framework: why 25 years and 7%

A simple payback period — net system cost divided by annual savings — captures the break-even point but ignores three phenomena that matter enormously over a solar system's life: the time value of money, utility rate escalation, and system degradation. The NPV framework addresses all three.

We use a 25-year analysis horizon because the median residential solar system carries a 25-year production warranty. Systems regularly operate beyond 30 years, but 25 years is the conservative standard NREL uses in its cost and value benchmarks. The discount rate — the rate used to convert future cash flows to present value — is set at 7% real (inflation- adjusted) by default, consistent with NREL's recommended residential discount rate for solar NPV analysis. This reflects the opportunity cost of capital for a typical homeowner who could otherwise invest in a diversified equity portfolio.

NPV (ownership structure) =
  −Net system cost (Year 0)
  + Σ (t=1 to 25) [Annual savings(t) / (1 + discount rate)^t]
  + Incentive cash flows in Year 1 (state credit, utility rebate)
  + Σ SREC income present value (where applicable)

Where:
  Annual savings(t) = Production(t) × Utility rate(t) − Loan/lease payment(t)
  Production(t) = Year 1 production × (1 − 0.005)^t   [0.5%/yr degradation]
  Utility rate(t) = Base rate × (1 + 0.028)^t           [2.8%/yr escalation]
  Loan payment(t) = Fixed (for fixed-rate loans) or 0 after term ends

The calculator surfaces NPV for all four structures side by side, along with the 25-year cost of doing nothing (continuing to pay utility bills without solar, also NPV-discounted).

System degradation: NREL 0.5%/yr

Solar panels lose a small fraction of output each year as the photovoltaic cells age. The NREL Tracking the Sun dataset, covering hundreds of thousands of residential installations, establishes 0.5% per year as the median degradation rate for modern silicon panels. Applied over 25 years, that means Year 25 production is approximately 88% of Year 1 production — not a dramatic decline, but enough to materially affect NPV if ignored. The calculator applies degradation to the production estimate year by year rather than using a flat annual average.

Utility rate escalation: EIA historical 2.8%/yr

The economic case for solar depends heavily on what you would otherwise pay for utility electricity. EIA Form EIA-861 annual data shows that the national average residential electricity rate rose from $0.1194/kWh in 2015 to $0.1561/kWh in 2024 — a compound annual growth rate of approximately 2.8% per year. The calculator uses 2.8% as the base escalation assumption and provides scenario analysis at 1% (low/flat rate environment) and 5% (high inflation or grid constraint scenario). The higher the escalation rate, the more valuable solar ownership becomes relative to a utility bill that grows every year.

The incentive capture problem with lease and PPA

The single most important financial difference between cash/loan and lease/PPA is incentive capture. When a third-party company owns the system, they claim:

• Any state income tax credit (which passes to the installer, not the homeowner)
• SREC revenue from all production registered under their ownership
• Any utility rebates payable to the system owner

The homeowner in a lease or PPA arrangement benefits indirectly through a lower monthly payment than they would otherwise negotiate, but the direct incentive value — which can represent 15–40% of system cost in high-incentive states like Massachusetts, Maryland, and New Jersey — never flows to them. The calculator quantifies this gap explicitly in the comparison output.

Named-expert guidance

Limitations

• Lease and PPA terms vary significantly by installer; actual escalation rates and end-of-term buyout prices may differ from assumptions.
• SREC prices are market-determined and can decline sharply in oversupplied markets.
• The model does not capture home-sale complications specific to each ownership structure — consult your real estate agent before signing a lease or PPA if you anticipate selling within the analysis horizon.
• Utility rate escalation assumptions are historical averages; future rates are uncertain.

Primary sources

• NREL PVWatts Calculator (pvwatts.nrel.gov) — production estimates by ZIP, tilt, orientation
• EIA Form EIA-861 — Annual Electric Power Industry Report (average residential electricity rates by state)
• Lawrence Berkeley National Laboratory, Tracking the Sun 2024 — system degradation rates and median installed cost
• EnergySage Solar Marketplace Report 2024 — lease escalation rates, market pricing, quote comparison data
• IRC §163(h)(3)(B) — home equity loan interest deductibility