Is No Money Down Leasing a Scam?
Everyone long once and a while, I'll get an email or phone call from people that ask me, "is this a scam?"
They'll continue to say something like:
I'm from Maine so I understand the skepticism and thinking that things can be too good to be true. Maine has suffered from wasting money on oil for so long, it seems strange there is suddenly an alternative. Thank you technology :)
The reason why people ask this is simply because they are not aware of the the amount of leasing that happens in our economy, and particularly in the renewable energy industry.
In this article, I want to explain the basic economics of financing renewable energy and energy efficiency programs and provide examples of where this is happening throughout the entire renewable and energy efficiency space.
Leasing highly efficient, but more expensive, energy equipment is not a scam. It's just the signal that a new technology has come along that costs more upfront, but provides long term, low risk returns.
They'll continue to say something like:
- Why would I want to rent this heat pump equipment and not just buy it?
- It seams too good to be true. I don't have to pay anything and I just save money?
- If heat pumps in Maine have such great economics, why wouldn't I buy it?
I'm from Maine so I understand the skepticism and thinking that things can be too good to be true. Maine has suffered from wasting money on oil for so long, it seems strange there is suddenly an alternative. Thank you technology :)
The reason why people ask this is simply because they are not aware of the the amount of leasing that happens in our economy, and particularly in the renewable energy industry.
In this article, I want to explain the basic economics of financing renewable energy and energy efficiency programs and provide examples of where this is happening throughout the entire renewable and energy efficiency space.
Leasing highly efficient, but more expensive, energy equipment is not a scam. It's just the signal that a new technology has come along that costs more upfront, but provides long term, low risk returns.
Why is No Money Down Leasing Used? Leasing Economics 101
Here is the simple explanation why leasing is used in energy, it has to do with the cash flows outlays of new energy technologies.
When dealing with new and super efficient energy technologies they require a large cash investment upfront to install the equipment. This investment provides long term, stable returns by low operating costs.
In these scenarios, there are two things important to note.
If you can invest the cash, in all of these examples, you should buy it in cash.
Here's the problem, the number of homeowners and business that don't have the cash, or need to keep it for other reasons, is the majority of the market. Even though they don't have the cash, they will want to figure out how save on heating costs.
Here's a simple cash versus leasing example with a commercial biomass heating system in Maine.
We see a similar situation with the solar pv market. Here's an example of what it might be like for a homeowner to buy versus lease a solar array.
Let's review
Financing and leasing in the renewable energy and energy efficiency is about removing barriers to adoption for all properties owners. Yes, these are amazing investment if you have the cash and want to spend it on a specific application.
The reality is that most property owners, both residential and commercial, do not have the cash, and if they did, they have other places they want to invest it. For these property owners, which represent a majority of the market, it makes sense to lease the equipment and lower operating costs instantly.
Financing provides a way to lower energy bills, and increase profits, for no cash with little to no risk.
When dealing with new and super efficient energy technologies they require a large cash investment upfront to install the equipment. This investment provides long term, stable returns by low operating costs.
In these scenarios, there are two things important to note.
- First, the savings once the technology is installed is very high. This is true in solar, LED lighting, and biomass heating, and heat pumps.
- Second, the installation cost for the technology is also extremely high. This is great for property owners that have the cash on hand to purchase the equipment and realize the returns over 20 years.
If you can invest the cash, in all of these examples, you should buy it in cash.
Here's the problem, the number of homeowners and business that don't have the cash, or need to keep it for other reasons, is the majority of the market. Even though they don't have the cash, they will want to figure out how save on heating costs.
Here's a simple cash versus leasing example with a commercial biomass heating system in Maine.
- Let's say that we have a 20,000 square foot commercial facility in Maine that uses around 5,000 gallons of oil to heat the building each winter.
- This costs $20,000 per year on oil. We'll assume that the cost of oil is going to increase 3% per year.
- If they installed a biomass heating system, it would reduce their heating bills by ~60% to around $8,000 per year. This is a $12,000 annual savings rate that will increase at 3% per year.
- The issue is that this new heating system might cost around $70,000.
- Is it a good investment to spend $70,000 to save $12,000 per year? Yes!
- Does that mean that the business has the cash to invest $70,000? No!
- Even if they had the cash, does it mean they might need to spend it in other places of their business, like marketing, hiring, investory, etc? Probably yes, it's very likely that the business can invest the money in other places with higher returns.
- Here's the alternative, a no money down biomass heating system lease. For no money down, they can have a biomass heating system installed, and simply save 10% on their heating bill per year, or around $2,000.
- Yes, they are saving much less, but they don't need to spend any money and they get cash to the bottom line that they can bank on.
We see a similar situation with the solar pv market. Here's an example of what it might be like for a homeowner to buy versus lease a solar array.
- A homeowner buys a 5kW solar pv array for their home for ~$2 per watt (after tax credits, etc).
- This means the total installation cost will be around $10,000.
- Let's say they pay $.16/kWh for electricity. This means that the array will produce around $1,280 of power per year. This assumes it produces 8MWhs per year.
- Is spending $10,000 to save $1,280 a great investment? Yes! This is an amazing investment. It's over 10% per year, every year, for 20 years. That's better than the stock market. It's even better, because the return will increase at the rate that utility prices increase.
- Does that mean that all homeowners have $10,000 to invest in solar? No
- Does that mean that if they had $10,000, they might want to invest in some other place? Yes! Of course that may want to.
- You pay $.16/kWh for electricity from the utility. You can sign a solar lease and for no money down, you can simple pay $.14/kWh for all the power that the solar array produces. Simple as that.
- That's a 15% savings, for no money and no risk.
- If you're electric bill was $1,000 per year, it will now be $850, because you're just switching to a cheaper energy source.
Let's review
Financing and leasing in the renewable energy and energy efficiency is about removing barriers to adoption for all properties owners. Yes, these are amazing investment if you have the cash and want to spend it on a specific application.
The reality is that most property owners, both residential and commercial, do not have the cash, and if they did, they have other places they want to invest it. For these property owners, which represent a majority of the market, it makes sense to lease the equipment and lower operating costs instantly.
Financing provides a way to lower energy bills, and increase profits, for no cash with little to no risk.
Here's other examples of no-money-down leasing application related to energy.
I want to show everyone a list of no money down leasing applications in the renewable energy business across our economy by technology. This is super short list that I just took off the top of my head, but it will provide some perspective.
Solar PV No Money Down Financing
Solar Thermal No Money Down Financing
Heat Pumps No Money Down Financing
Biomass No Money Down Commercial Biomass Financing
High Efficiency Lighting No Money Down Lighting Financing
HVAC and Efficiency Upgrades
Solar PV No Money Down Financing
Solar Thermal No Money Down Financing
Heat Pumps No Money Down Financing
Biomass No Money Down Commercial Biomass Financing
High Efficiency Lighting No Money Down Lighting Financing
HVAC and Efficiency Upgrades
Why and When to lease?
When looking at purchasing or financing energy efficiency or renewable energy technology, it's important to understand when it makes sense to buy and when it makes sense to lease.
At it's core, it comes down to a very simple analysis.
Why and when to pay cash
Why and when to lease
At it's core, it comes down to a very simple analysis.
Why and when to pay cash
- First, you must have the cash to invest. It doesn't matter how amazing the returns are, if you don't have the cash, you can't invest it.
- You're building new construction and the equipment is in the mortgage.
- You plan on living in your home for a long time.
Why and when to lease
- You have the cash, but want to save it for other purposes.
- You don't have the cash but want to lower your heating bills.
- You own your home and plan on staying there for the forsearable future.
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