Michael Leibreich, chairman of Bloomberg Finance’s Research Group on Energy Finance, recently stated that he believes the cost of developing a solar power project will be cut in half in the next decade. These cost reductions will pave the way for utility scale solar and they will also help make solar a viable option for residential solar.

Residential solar installations will remain a key part of the solar industry’s remarkable growth, and the distributed nature of these systems represents some of the most unique and most advantageous aspects of solar technology; however, reductions in technology costs are not enough to make solar affordable for everyone. Luckily, today, a homeowner has more options than ever to help finance the installation of a solar energy system.

The most basic way is to pay for the system out of pocket. This approach leads to the highest rate of return — assuming the homeowner can take full advantage of the federal investment tax credit/grant, state incentives, and the value of Solar Renewable Energy Credits or SRECs. However, solar PV systems still pose a high initial cost, and many residents do not have the ability to pay for the system completely out of pocket.

A subset of this option is taking out a loan to pay for the system. Residents can take out home equity loans from their banks or secure low-interest loans to cover the system cost from their installers. (In D.C., homeowners have received access to zero-interest loans for the first year through their solar installer.) This approach also allows the homeowner access to all the economic incentives for going solar, which along with energy savings, can be used to repay the loan in a very reasonable period of time.

Two other options that do not require the homeowner to fund the entire cost of the installation would be to (1) lease the system or (2) enter into a Power Purchase Agreement (PPA). Although these structures are now common among commercial solar installations, these financing structures are becoming more popular with homeowners in the past two years.

While the nuances of leasing structures often differ, the customer is basically leasing the solar energy system just like someone leases a car. This approach allows the customer to reduce energy bills without the high initial cost of going solar. However, in leasing a system, the homeowner would not own the system; therefore, they would not receive the federal tax incentives or state rebates – and in most cases they would not be able to take advantage of the economic incentives like selling SRECs.

Finally, a Power Purchase Agreement allows a homeowner to purchase electricity from a system located on their roof at a reduced rate. This means the homeowner will experience savings on their energy bills without large upfront costs. However, just like in leasing the system, the customer will not own the system, be able to take advantage of SRECs, or the federal and state incentives. In effect, they have not “invested” in a solar energy system, but they will still reap financial benefits because they’ve created a hedge against rising utility costs.

It can be a difficult decision for homeowners when selecting which financing option to use. A lot will depend on how the homeowner feels about the high upfront cost associated with owning a PV system. However, if the customer can afford the initial capital, then purchasing the system will provide them with a return on investment over the lifetime of the system.

By owning a solar energy system, the homeowner will be able to monetize all available incentives and also reap the value of producing clean electricity through the selling of SRECs. SRECs are valuable because several states have solar-carve outs in their Renewable Portfolio Standard (RPS) that require energy suppliers to procure a certain percentage of their electricity from solar or pay a steep Alternative Compliance Fee (ACP).

At Sol Systems, we offer 1, 3, 5, and even 10-year agreements for monetizing the SRECs of a system depending on the state. Fixed cost agreements such as Sol Annuity allow customers to confidently know their cash flow due to SRECs and subsequently calculate their payback period more accurately.

It is important for these financing options to remain economical choices as residential solar continues to grow. Furthermore, it is important homeowners take their time and fully understand the advantages and disadvantages before choosing how to finance their solar system.