What Is the Difference Between a PPA and a Lease?
When you decide to switch to home solar power, one of the most critical considerations is how to pay for the installation. The main decision comes down to either purchasing or leasing your solar project.
Purchasing your solar system via bank loan, or a specific solar loan allows you to claim the 26% federal tax credit . When you decide to finance your home solar energy installation, you should know all your available options, including —
- A Solar Power Purchase Agreement (PPA)
- A Solar Lease
- Conventional financing (a solar loan)
This blog post breaks down the difference between solar Power Purchase Agreements (PPAs) and solar leases, and then explains why conventional financing or solar loans are usually the best options for homeowners.
Solar PPA vs Lease
One significant trait both solar PPAs and solar leases share is that neither offers a path to owning the solar PV system installed at your home. Both solar PPAs and leases originate with a third party, so homeowners and renters must conduct their own independent research and read the terms and conditions carefully to avoid hidden fees.
With a PPA, a developer pays for a home solar installation as part of the construction, then sells the solar power to homeowners at a fixed rate.
Similar to leasing a car, with solar leases, you make monthly payments toward your solar panels and use the renewable energy they generate to reduce your utility bills.
Following are some key differences between solar PPAs and solar leases:
|FEATURES||SOLAR PPA||SOLAR LEASE|
|Monthly payment||Fixed price per kilowatt-hours (kWh) for power generated.||Fixed monthly ‘rent’ for using solar panels.|
|Term length||20-25 years||10-25 years|
|Restrictions||A homeowner can neither own nor lease the solar PV system, and developers keep all solar renewable energy credits (SRECs).||A homeowner leases the solar panel and components. You may be able to negotiate to keep SRECs for yourself.|
|Types||On-site/ Behind-the-Meter PPAsRetail-Sleeved PPAsVirtual PPAs||Capital leaseOperating lease|
Solar PPAs and leases are best suited for customers who
…do not qualify for solar loans
…do not own their homes
Some solar contractors offer different programs for solar PPAs and leases that can vary widely in terms of cost.
What are the downsides of solar PPAs and leases? :
- Third-party lease/ PPA partners: Your solar contractor may use third-party financing or lease/ PPA partners. In such cases, your own independent research can ensure each company is financially healthy and has been in business for a significant length of time.
- Third-party solar installation/ maintenance companies: It’s common to sign a solar PPA/ lease with one company that then outsources the installation to a third party, while solar panels and equipment are owned by yet another company. As a homeowner, you need to be aware of any potential complications regarding maintenance or repair services from all companies involved.
- Hidden costs: There might be hidden up-front costs passed along by third-party companies, as well as unfavorable lease or agreement conditions of which you were unaware. Make sure you review all the details before you sign an agreement.
- Variable costs: Because you only pay for the electricity you use, PPAs can vary in monthly costs depending on your energy usage. As utility rates increase, leasing prices can also increase annually, undercutting the expected cost benefits.
- Potential challenges to selling your home: If you plan to sell your house, most PPA/ lease companies allow you to transfer the installed solar PV system to a new homeowner. However, some homebuyers may not be interested in purchasing a house with a leased solar system. In this case, you might have to buy out the lease or PPA contract, which often comes with early termination fees (ETFs).
- No tax credits: Because you do not own the solar PV system, you can not claim solar tax credits or incentives. The PPA or the lease company claims it for themselves. However, having a solar system often increases the value of your home, which in turn, can also raise your property taxes.
Considering these aspects of solar PPAs and leases, using traditional finance vehicles—like a home equity line of credit (HELOC), or a solar loan—to pay for your PV system installation might be a better option for you.
Why Financing is A Better Option
The benefits of owning a solar PV system through financing outweigh those of leases or PPAs. Some of the key advantages of solar financing include —
- Reduced lock-in period: With PPAs and leases, you are locked into a 20-25 years contract, whereas most solar loans are paid off in under 12 years.
- Tax incentives: As you are directly investing in a solar panel system, you are eligible for a federal investment tax credit (ITC) and other federal or state tax incentives.
- Zero Down Payment: With the right solar company, you can enjoy zero down payment and zero interest for solar loans.
- Owning the Solar PV system: At the end of a lease or PPA, you can either buy the system at fair market value or ask the lease or PPA company to remove it from your roof. However, once you have paid off the solar loan, you are a proud homeowner with an increased value of your house equipped with a solar-powered PV system.
While you are doing your math about the best option for your needs, it is essential to note that installing a solar energy system is a significant expense that can impact your short-term and long-term finances. An experienced solar installer can help you with unbiased information on going solar and the best solution to address your needs.
At Baker Electric Home Energy, we are committed to providing low-interest solar financing to customers through our preferred financing partners. Throughout the process of “going solar” —from our free initial consultations, to advice on financing your panel installation, all the way through the follow-up maintenance and repair—we offer a one-stop solution for all your solar energy requirements.