Power Purchase Agreements (PPAs) and Solar Lease Numbers- 3 Comprehensive Calculations

If you’ve sought out solar quotes recently you’ve undoubtedly received quotes for a Solar Lease or Power Purchase Agreement (PPA). These options have been dominating the solar market over the last few years, but why? Is it really worth it or is it too good to be true?

Previously, we wrote about why installers and sales orgs lean into selling solar leases and Power Purchase Agreements (PPAs), which you can read here. Below you’ll find breakdowns of what Solar Leases and PPAs look like in practice.   

Leases & PPA’s By the Numbers

At their core, leases and PPA’s seem simple enough. In both options, the solar company would look at your bills and calculate your average monthly payment – let’s say it is $140.

Lease	PPA
A lease seller will calculate that the lease is going to save $50/month, so the lease payment is set at $90.	A PPA seller will calculate at a set rate per kWh (kilowatt hour) 20% lower than you pay today.

Unfortunately, it gets more complicated thanks to panel degradation, escalators, and the rising cost of electricity. 

PPA and lease providers will often introduce “escalators” into their contracts that cause payments to increase every year. 

The idea is that electric rates will continue to rise so your new solar monthly payment should too. Many solar companies claim the annual electric rate increases are anywhere from 3-5% annually while data from the US Energy Information Administration shows that to be closer to a 2% annual increase. Couple that with the fact that the average solar panel degrades at approximately 0.5% per year, and it creates a situation where your solar panels produce less and less electricity and your lease payment continues to climb. 

Below is an example of how a lease works for a homeowner. 

Year	Electric rate	Annual Energy Produced	Cost of Energy from the Grid	Lease Payments w/ 3% Escalator
1	0.16	10,936	$146	$96
2	0.16	10,881	$148	$99
3	0.17	10,827	$150	$102
4	0.17	10,773	$152	$105
5	0.17	10,719	$155	$108
6	0.18	10,665	$157	$111
7	0.18	10,612	$159	$114
8	0.18	10,559	$162	$118
9	0.19	10,506	$164	$121
10	0.19	10,454	$167	$125
11	0.20	10,401	$169	$129
12	0.20	10,349	$172	$133
13	0.20	10,298	$174	$137
14	0.21	10,246	$177	$141
15	0.21	10,195	$179	$145
16	0.22	10,144	$182	$149
17	0.22	10,093	$185	$154
18	0.22	10,043	$187	$158
19	0.23	9,992	$190	$163
20	0.23	9,943	$193	$168
21	0.24	9,893	$196	$173
22	0.24	9,843	$199	$178
23	0.25	9,794	$202	$184
24	0.25	9,745	$205	$189
25	0.26	9,696	$208	$195

Let’s say this home uses the US average of 10,500 kWh per year, and their electric rate is the US average $0.16/kWh. The lease they signed saves them $50/month year 1 with a 3% annual escalator. The solar system designed for this homeowner was estimated to produce 104% of their annual power- or 10,936 kWh per year.

Based on the amount of energy the panels made in year 1, the “avoided cost of energy” (what would have been paid if power was bought from the grid) was $146 and the lease locked the payment in at $96. Every year after, the utility price increases by 2% and lease payment increases by 3%, while the amount of power produced by the panels goes down by 0.5% to account for solar panel degradation. 

After 10 years on the lease, the solar panels produce under 100% of the homeowner’s needs. Even so, the lease payment will still continue to increase. By year 25, these panels are producing about 88% of what they did at year 1, leaving the homeowner with a high lease payment and buying additional power from the utility. 

The same issues exist with a PPA, but the method of payment can sometimes vary by how much energy is produced that month. Here’s the same solar system as above broken out by its monthly production and payment:

	Production	Payment
January	771	$99
February	753	$96
March	971	$124
April	981	$126
May	969	$124
June	960	$123
July	1048	$134
August	1050	$134
September	986	$126
October	906	$116
November	822	$105
December	719	$92

PPAs set up for variable payments typically cost more during the summer since your panels produce more. Payment goes down during the winter months as you produce less, but you may also need to buy power from the utility if your consumption is high. Here’s the full 25 year breakdown where the PPA provider promised a 20% savings on energy rate.

Year	Electric Rate	Annual Production	Avoided Cost of Energy	PPA Rate	PPA Monthly Payment
1	0.16	10,936	$146	$0.128	$117
2	0.163	10,881	$148	$0.132	$120
3	0.166	10,827	$150	$0.136	$123
4	0.170	10,773	$152	$0.140	$126
5	0.173	10,719	$155	$0.144	$129
6	0.177	10,665	$157	$0.148	$132
7	0.180	10,612	$159	$0.153	$135
8	0.184	10,559	$162	$0.157	$139
9	0.187	10,506	$164	$0.162	$142
10	0.191	10,454	$167	$0.167	$145
11	0.195	10,401	$169	$0.172	$149
12	0.199	10,349	$172	$0.177	$153
13	0.203	10,298	$174	$0.182	$157
14	0.207	10,246	$177	$0.188	$160
15	0.211	10,195	$179	$0.194	$164
16	0.215	10,144	$182	$0.199	$169
17	0.220	10,093	$185	$0.205	$173
18	0.224	10,043	$187	$0.212	$177
19	0.229	9,992	$190	$0.218	$181
20	0.233	9,943	$193	$0.224	$186
21	0.238	9,893	$196	$0.231	$191
22	0.243	9,843	$199	$0.238	$195
23	0.247	9,794	$202	$0.245	$200
24	0.252	9,745	$205	$0.253	$205
25	0.257	9,696	$208	$0.260	$210

As you can see, as time goes on and the panels start to produce less power but the PPA payment continues to increase, and the gap between what you would have had to pay for that power and what you’re actually paying for the PPA closes, costing homeowners more money.

Alternative Payment Options

When it comes to payment options, homeowners have several other choices. While the two options above do give you predictability and allow you to avoid upfront costs, they come with some serious downsides. Ownership is another great method of going solar, giving homeowners control over their system rather than being beholden to another organization. By having your solar installer include an insurance-backed warranty product, you won’t need to worry about recurring maintenance costs. 

Cash purchases are the gold standard of solar buying. By owning the system outright you greatly reduce or almost eliminate any payments you were making for energy, and get to take advantage of potential tax credits and local incentives. Financing your solar system also lets you access incentives, but adds on a monthly payment and potential extra costs from dealer fees (fees baked into your loan). Your installer can work with you to find a loan who’s monthly payment is similar or lower than your current average electric bill. 

Here’s a sample of how a solar system recoups its cost and what the returns look like for a homeowner. For reference, this system is the same as the above models; 6.5 kW (kilowatt) producing 10,936 kWh (kilowatt hours) annually.

Year	Electric Rate	Annual Production	Annual Energy Savings	Return
0 (initial investment)				-$13,650
1	0.16	10,936	$1,750	-$11,900
2	0.163	10,881	$1,776	-$10,124
3	0.166	10,827	$1,802	-$8,322
4	0.170	10,773	$1,829	-$6,493
5	0.173	10,719	$1,856	-$4,637
6	0.177	10,665	$1,884	-$2,753
7	0.180	10,612	$1,912	-$840
8	0.184	10,559	$1,941	$1,100
9	0.187	10,506	$1,970	$3,070
10	0.191	10,454	$1,999	$5,069
11	0.195	10,401	$2,029	$7,097
12	0.199	10,349	$2,059	$9,156
13	0.203	10,298	$2,090	$11,246
14	0.207	10,246	$2,121	$13,367
15	0.211	10,195	$2,152	$15,519
16	0.215	10,144	$2,184	$17,703
17	0.220	10,093	$2,217	$19,920
18	0.224	10,043	$2,250	$22,170
19	0.229	9,992	$2,283	$24,454
20	0.233	9,943	$2,318	$26,771
21	0.238	9,893	$2,352	$29,123
22	0.243	9,843	$2,387	$31,510
23	0.247	9,794	$2,423	$33,933
24	0.252	9,745	$2,459	$36,392
25	0.257	9,696	$2,495	$38,887

The initial cost above assumed the solar was sold for $3/watt, meaning $19,500. After a 30% federal tax credit, the homeowners investment was $13,650. We applied the same 2% utility escalation and 0.5% annual panel degradation as the PPA and lease examples. Except in this case because the homeowner bought their solar outright, you’ll see that between year 7 & 8 the system has offset enough energy cost that it paid for itself. It then goes on to produce almost $40,000 of value after that point. 

Financing your solar yields similar results but the monthly payment and interest greatly affect the payback period.

Financial Summaries

Every home and every homeowner has a different financial situation. Maybe you are on a fixed income or can’t take advantage of tax credits and a Solar Lease of PPA would be the best option for you. 

A summary of the financials though leans the conversation heavily to one side. A basic evaluation every homeowner needs to do is to ask 1.) What will this cost over its lifetime? and 2.) How much will it save me?

Let’s look at the total investment versus amount saved in each of the above scenarios. The solar lease, Power Purchase Agreement (PPA) and cash purchase numbers are all based off the same example system: 6.5 kW array facing due south at a 30 degree angle, producing 10,936 kWh annually. The system was designed in the National Renewable Energy Lab’s (NREL) PV Watts calculator. The system is cash priced at $3/watt, the lease was set to save $50/month on energy bills, and the PPA was set for a 20% reduction in utility rate. 

Solar Lease

• Total Investment (sum of 25 years of payments) = $41,919
• Total Energy Savings (difference between utility cost and lease cost over 25 years) = $10,618

Power Purchase Agreement

• Total Investment = $47,721
• Total Energy Savings over 25 years = $4,815

Cash Purchase

• Total Investment (after tax credit) = $13,650
• Total Energy Savings = $58,387

There are a lot of factors which will go into any home’s solar production and your home may not see these same numbers. But if it can be afforded, owning your solar is a  much better investment. With a high quality solar array on your roof- backed by an insurance-backed warranty- and a great solar partner to guide you, energy savings are at your fingertips.