So you’re being sold on a Power Purchase Agreement (PPA) or Solar Lease…
It’s 10 AM on a Saturday. You just dropped your kids off at a friend’s house. You finally have a moment to sit down with your partner and talk through finances, upcoming college tours, paying off your auto loan… The doorbell rings, and a fresh-faced sales rep is greeting you wearing a flat-brim hat, running shoes, and a brightly colored polo. “Alright,” you think to yourself, “let’s hear what they have to say.”
You’ve thought about solar. You want to do your part. Your techy friend won’t stop talking about how much money she’s saving and how she never has power outages because she decided to buy batteries. Maybe it’s finally time for you to hop on the solar bandwagon, too.
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The Pitch
iPad in hand, this charismatic sales rep has already modeled a solar system on your roof via satellite imagery, taken a picture of the utility bill they asked you for, and told you the many ways in which “XYZ Solar is changing the energy landscape and building a better future.” Okay, now here come the numbers. Sign a 25 year contract to save $50 per month. “Let me think about it,” you tell them, as you stand up from the kitchen table and escort them back to the front door.
What they didn’t tell you about – and why
As you compare the options and attend Google University to try and learn everything there is to know about a solar energy system, one key question is on the top of your mind – what’s the difference between a solar lease and PPA, and should I even sign up for one?
Don’t sign those papers just yet, let us help you fill in the gaps.
There are two primary ways for a homeowner to pay for solar panels: own the system, purchase it with cash on hand or finance it via loan, or let someone else own the system and just purchase the power it produces.
A solar system owned by a homeowner and a solar system owned by a third-party company interacts with your home and the utility grid in the same exact way–the only difference is how you, as the homeowner, pay for the system (or the power it produces).
The Differences Between Leases and PPA’s
Depending on the market in which you live, you’ll probably be offered either a lease or a PPA (Power Purchase Agreement). Both contracts operate in the same function- you (the homeowner) don’t actually own the equipment installed attached to your home and are simply paying for the energy produced.
In contract terms, PPA contracts will reflect paying for the power the system produces and leases typically reflect a cost per month for the solar equipment. In both cases, Solar leases and PPA payments are typically fixed, but there are PPA’s that feature variable payments too.
The idea behind PPA’s and leases is that purchasing solar equipment is an investment upwards of $20,000. A third party organization will upfront the money to buy all the equipment and cover maintenance costs for the term of the contract, typically 25-years. Homeowners get clean energy supplied to your home at a discounted rate. Some installers say they’ll save you 5-20% on your bills, others approach it as $50-150/month savings.
But what’s the catch? Well, when solar is purchased, the purchaser qualifies for the Federal Residential Clean Energy Tax Credit, also known as ITC. This amounts to 30% of the total cost as a credit toward taxes. In addition, businesses are also able to claim the Modified Accelerated Cost Recovery System (MACRS) depreciation credit.
Between these credits and any applicable state-specific incentives, your PPA or lease provider will have recouped 50-75% of their total cost before you ever make your first payment. Your recurring monthly payments pay for the rest of the system and give the company a recurring revenue source.
Below, we’ll break down each case individually and provide some examples on how your payments may be structured.
Solar Lease
Under a solar lease, a third-party company installs, owns, and maintains the solar panels on your property. You pay a fixed monthly payment to use the solar energy system, regardless of how much electricity it generates. Every year after, the fixed monthly payment usually increases by 1-5%. This is called an escalator, and is included in most Solar Leases. In rare cases leases are fixed for the duration of the contract. The leasing company retains ownership of the system throughout the lease term, typically 20-25 years.
This option provides predictable monthly payments and potential savings on your electricity bills, often with no upfront cost or a low initial cost. The leasing company is responsible for maintenance and repairs. The monthly lease payments are fixed and may not always result in savings if your electricity consumption changes or your system is inoperable for a long period of time.
Power Purchase Agreement (PPA)
Under a PPA, a third-party company installs, owns, and maintains the solar panels on your property. You agree to buy the electricity generated by the panels at a predetermined rate per kilowatt hour (kWh), usually lower than your local utility rate.
With a PPA you will see a rate per kWh and a rate of escalation. The rate of escalation refers to the annual increase in the cost per kWh that you will pay for the electricity generated by the solar system.
The third-party company retains ownership of the solar system for the duration of the agreement, usually 10-25 years. A PPA offers a lower out of pocket cost and potential savings on your electricity bills as you will only pay for the power you use. However, the third party will gain the benefits of any tax credits or incentives but is responsible for maintenance and repairs.
Customer Owned Solar – Cash Purchase
Cash is king when it comes to purchasing a solar system. If you can afford it, you’ll avoid financing fees and interest. Plus, the money offset on your utility bill will recuperate your investment.
When you opt for a cash purchase, you purchase the solar system outright and own it immediately. This option requires the highest initial investment, as you pay the full cost of the equipment and labor. The primary benefit is that you get the maximum financial return over time, including potential tax credits, incentives, and significant savings on your electricity bills giving you full control over the system without ongoing payments.
Some states have their own incentives for homeowners investing in solar. You can look up your state’s incentives here.
Customer Owned Solar – Financed
Financing a solar system involves taking out a loan. You make monthly payments over a set term, like a car loan or mortgage. With financing, you still own the system and can benefit from tax credits and incentives.
This option spreads the cost over time, making solar more accessible without a large upfront payment. The interest rates and terms of the loan will affect the total cost of the system. While you will pay more overtime due to interest, financing allows you to enjoy the benefits of solar ownership without a substantial initial investment. You can work with your solar provider to find a loan who’s monthly payment is lower than your average electric bill.
While traditional forms of financing – banks, credit unions, HELOCs – are available, many solar providers will approach homeowners with loans designed with solar in mind. These loans break up the loan into an 18 month term and then a “remainder” term. During that initial 18 month term, homeowners can file for and receive their federal tax credit.
The monthly payment during the 18 month term will be lower, and if the tax credit is applied to the loan the monthly payment stays the same after. If it’s not applied, the monthly payment increases drastically.
Weighing the Pro’s and Con’s
Each purchasing method has upsides and downsides. Consider what is most important to you and what your financial situation entails. Weigh out all of the advantages and disadvantages, and make your decision. A good solar partner will help guide you through this process.
Solar PPA/Lease agreements let you experience immediate ROI but become less and less beneficial over time. Most contracts also don’t allow you to add on to the system – so if you ever wanted more panels or a battery you’re out of luck. Leases and PPA’s also cause headaches when selling your home, incurring costly transfer fees. Unless the new homeowner wants to sign onto and assume your lease payments, you may need to buy out the remainder of your contract at a price the installer gets to set.
If you decide to enter a PPA or Lease agreement–and even with some Solar Loans–you will have a UCC-1 fixture filing placed on your property. This is a specific type of lien for equipment that cannot be easily removed from your property. This UCC-1 filing will need to be “lifted” (temporarily removed) by the PPA/Leasing company or lender if you need to refinance, and–of course–if you sell your home.
Owning your solar puts you in the driver seat and provides far more significant savings over time. You’ll also be able to take advantage of tax credits and state incentives, along with a home value increase from the new asset. In a study published by Zillow, homes with solar sold for 4% more on average than comparable homes without. Study link here.
However, if you financed your solar the loan may not be transferable. If so, you’ll likely have to pay off the loan when you sell your home. Owning your solar also means you’re in charge of any maintenance requirements over its lifetime. Solar panels and inverters typically come with long term warranties, but a great solar provider will back you up with an insurance-backed warranty to fill the gaps manufacturer warranties have and cover labor.
Why a Solar Company May Prefer One Option Over Another
Some solar installers believe that homeowners owning their solar systems is best for everyone involved. No middleman owns the system—you, as the homeowner, own the system. Any service or workmanship issues can be resolved directly between you and the installer.
Solar Loan financing has been the predominant method for the last several years. However, rising federal interest rates have made instant monthly savings via Solar Loan harder to achieve. A sales rep can often show a homeowner immediate monthly savings when comparing a PPA/Lease payment to their current monthly electricity bill, which can be hard for a homeowner to say no to.
Solar installers are incentivized to install more solar systems to achieve economies of scale. To keep their installation volume high, many solar installers have opted to only offer PPAs and Solar Leases, given the perception that the more money a homeowner can save from Day 1, the more likely it is that the sales rep will make a sale.
When meeting with a sales rep, you may only receive one purchasing option simply because this is the only option they have available to show you. Even if the solar installer makes all financing options available for their sales reps, it’s still possible that the sales rep is not showing you all of the available options.
Your solar installer should be transparent about all of the process steps for your given state, city, and utility provider. They should present solar as a construction project. Perhaps most importantly, you should consider what long-term support will look like–solar installers with a reputation for superb service years down the line after the system is installed should be at the top of your list for quotes.
What Should You Do
As is often the answer in solar, it depends. No one solution fits everyone or every home. Even two different owners of the same house can have wildly different needs.
There is no one-size-fits-all solar financing method. The best thing any homeowner can do is shop around. Get at least a few quotes and go with the highest quality company that educates you and helps you make a decision based on what’s important to you. If you can afford to purchase the system through cash or by taking out a loan, it’s an unmatched solution. Ownership is the most simple and straightforward method of going solar, and the returns are far superior.
Over the lifetime of the solar agreement, leases and PPAs usually cost more than the cash/loan price of the system. When you own your panels you get full advantage of the energy savings, state and federal incentives, an increase in your home’s value, and the flexibility to add on to your system as needs change.
Third-party owned systems lock subscribers into a long term contract predicated upon utility prices increasing more than contract escalation to ensure you save money as time goes on. Best case scenario you get a small amount of savings over time, worst case scenario you end up paying more than you did before you had solar.
Solar, like any construction project, can be like solving a puzzle. A good partner will help navigate the waters and provide a great experience. Get multiple quotes, ask for references, and scour reviews if you really want to be confident in the legitimacy of your prospective solar installer.
Always add an insurance-backed warranty like the Solar Insure 30-Year Warranty and 20-Year Battery warranty to your purchase, ensuring you’re covered long term.
