What is the Difference between a PPA and a Lease?
Help to decide whether to get a solar PPA or a solar lease.
Are you deciding whether to get a solar PPA or a solar lease? To someone who does not already have a thorough understanding of how solar power saves money on their electricity bill, the difference between a PPA (Power Purchase Agreement) and lease can be subtle and almost indistinguishable. Solar leases and solar PPA are arrangements where the homeowner does not own the solar energy installation on their roof, it is owned by the lease or PPA company. There are pros and cons between this model vs a traditional
finance or cash ownership model, and pros and cons between a solar lease and a solar PPA. This article should be your starting point in researching which model is the best fit for your individual renewable energy needs. I point out multiple times below that you must do your own math when comes down to making a decision – different solar contractors have different options from different partners, they will almost always be biased towards the programs they have available.
Here is the difference between a solar lease and solar PPA in plain English, however, most of you will need to continue reading to fully understand.
- Lease: The homeowner leases the solar panels and components, but the homeowner’s relationship with their utility and how they buy/sell electricity, such as Net Metering, is no different than someone who owns a solar panel system. The homeowner pays fixed monthly lease payments for the duration of the lease term, usually 20-25 years.
- PPA: The homeowner neither owns nor leases the solar system. The PPA company installs their own system on the roof and sells the homeowner the electricity it produces at an agreed upon amount. Depending on the agreement, the homeowner pays for only the electricity they use not a fixed monthly amount, or they can pay a fixed monthly amount – just depends on which option works best for the individual. PPA contracts usually last 20-25 years.
Solar PPA and solar leases are so similar that there is no easy answer to which one is best for an individual homeowner. Different solar contractors offer different solar PPA and solar lease programs and costs can vary widely. There are prepaid leases, PPA with down payment, zero down, free installation, different kW system sizes and component manufacturers… It is the homeowner’s responsibility to do their own math. Until the homeowner feels they have researched all available lease, PPA,
cash and finance (solar loan) options, they should not move forward. Never rely solely on what a solar salesperson tells you, independent online research on the pros and cons of all options is necessary. Find out which companies the solar contractor uses as their third-party financing or lease/PPA partners and research them online as well. You might find that the solar contractor has an excellent reputation, but their PPA or solar leasing company might have hidden up-front costs being passed along to the lessee or unfavorable lease agreement conditions you weren’t aware of.
Something else to be aware of
It is common to be sold a PPA or lease by one company, who then outsources the installation to another, and yet another owns the panels and equipment. This scenario is common in the lease and PPA industry because the company who sells a lease or PPA is not responsible for the maintenance or production of the solar system, they are simply ‘brokers’ between the homeowner and the company who owns the system on the roof. Although this arrangement does not necessarily mean the homeowner is getting a sub-par system or being misled, it can mean complications in the future. Take for example, five years down the road the homeowner discovers their system is not producing the amount of solar energy promised. They report the issue to the company who sold them the system with the expectation the problem will be resolved quickly. Unfortunately there could be a lengthy battle behind the scenes as to who is at fault between all the companies involved. In some cases one or more of the companies may no longer be in business.
Ask the right questions to discover if there are multiple companies involved in the installation of the system and research all of them. Make sure each company is financially healthy and been in business for a significant amount of time with thousands of satisfied customers. Check their BBB status and look them up on Yelp. Generally speaking, it is better for the homeowner if the company who sells the solar system is the same company who comes out to install it.
The real question is should you be financing instead?
In many cases, it is better financially for a homeowner to pay cash or finance a system rather than lease or PPA. With a lease or PPA agreement, the homeowner is locked into a 20 or 25 year contract, whereas most financed (third-party solar loan) solar power systems are paid off in 12 years or less. Another benefit to financing is the homeowner owns the system after it is paid off; unlike at the end of a lease or PPA when the homeowner only has the option of buying the system at fair-market value, or having the lease or PPA company remove it from their roof. Homeowners who finance or pay
cash for their solar renewable energy system also get to claim the 30% ITC (investment tax credit) or other tax incentives where in the case of a lease or PPA, the lease or PPA company claims it for themselves. There can also be challenges selling a home while in a lease or PPA contract, although most, if not all, lease and PPA companies allow the system to be transferred to a new homeowner, some home buyers might simply not be willing to do it. There are many cases in which the seller had to buy-out the lease or PPA contract before the buyer was willing to purchase the home. Generally speaking, a solar lease or solar PPA is the best option only when the homeowner does not qualify for financing or does not have cash.
When is a lease or PPA a better option than financing?
Lease and PPA are excellent for people in very specific situations. Keep in mind that some solar contractors ONLY offer a lease or PPA and are unlikely to provide unbiased information on financing. They may try to sell a lease or PPA even if financing or cash is clearly the better option. This is true even of some large national solar contractors that offer no options beyond a solar PPA or lease. Again, the homeowner needs to get multiple proposals from contractors with a variety of options.
- People with low tax liability.
One of the major advantages to owning your solar system vs leasing or PPA is that by owning the system, the homeowner can claim the 30% ITC (investment tax credit). However, if the homeowner does not have a large enough tax liability, some or all of their ITC could go unused. But be aware the homeowner does not get the ITC in a solar lease or PPA agreement either – the solar company keeps it for themselves. This puts the solar leases/PPA on more equal footing as a finance option or cash purchased system.
- People with credit problems.
Some people might not have a high enough credit score to qualify for a solar loan. The credit requirements for a lease or PPA are much lower. Credit score alone could limit people to only a lease or PPA.
- No down payment
Some homeowners are only interested in saving money on their monthly electricity bill, regardless of which is the best long-term option. For example, they might have an immediate monthly savings of $50 by installing a lease or PPA. Because leases and PPA programs are generally zero down payment, the homeowner can start saving money with no up-front costs the moment the system is installed.
- Variable payment
PPA, not leases, can have a variable monthly cost. Because with a PPA the homeowner is only paying for the electricity they use, not a fixed monthly lease amount, some people might find this to be the better financial option. In most cases, however, the PPA company is going to size the solar energy system exactly to homeowner’s needs and the variable monthly cost will even out over time to a similar amount to that of a lease. In other words, the PPA’s variable payment is likely to be about the same as a fixed lease payment when averaged over time.
- It’s just simple
If a homeowner just wants to go solar as quickly and easily as possible unencumbered by research, then a solar lease or solar PPA is the answer. A few signatures later and an installation crew will come out in a few weeks to install a system. There really isn’t a logical scenario when this is the right way to make a decision; homeowners should always consider all options and do the math. Some homeowners are lured into a solar PPA or solar lease because it ‘feels’ like less of a commitment than owning a system, but the reality is a PPA or lease is actually a greater commitment as contracts are generally 20-25 years, where solar financing or a solar loan is generally 12 years or less.
Frequently asked questions
- What makes solar energy right for someone’s house?
There are a few basic qualifying questions, such as do they own the home, have access to the roof (not a condo or similar), and have an electricity bill somewhere around $80 or higher. If the answer is yes to all of these, solar might be right. You should contact a solar contractor for more information.
- What is a power purchase agreement?
A Power Purchase Agreement, or PPA, is an arrangement where a PPA company installs a solar energy system on a homeowner’s roof and the homeowner buys the electricity generated by the system at a fixed amount. The homeowner does not own the solar system.
- Is it better to do a PPA or a lease? Why?
The difference between a PPA and a lease are very subtle, in fact, there almost is not difference from the homeowner’s point of view. Different solar contractors will have different lease and PPA options.
- Why doesn’t a PPA require you to have an electric bill for the excess power needs as well?
Any excess electricity the homeowner requires that the PPA does not cover will come from the homeowner’s power company. At night, for example, when the sun is down and the solar panels are not producing electricity, the home will draw energy from the power company.
- Which of these options is best for the customer over the long-term? Why?
If cash or financing is not available to the homeowner, leasing or PPA might be their only option. Lease and PPA programs vary widely from one solar contractor to the next.
- Which of these options is best for the customer over the short-term? Why?
Either a lease or PPA are generally the best over the short-term because they are usually installed with zero-down and no up-front costs. But this can be short-sighted; in most cases the long-term gains of financing a system outweigh the short-term benefits of a solar lease or solar PPA. If you go with a least or PPA, make sure it’s for the right reasons – and not because you were lured by short-term math.
- Is one of the options preferable based on geographic location (i.e. sunlight exposure) or other factors? Why?
Geographic location has no impact on lease vs PPA, or lease/PPA vs finance or loan. Geographic location, sun exposure and similar factors only have an impact on solar system sizing and how it is installed on the roof – these factors are independent of the financial arrangement of how the system is being paid for. In other words, no matter which financial model you select in order to get a solar energy system on your roof, it has no impact on how the system should be designed.
You need to hear all options available for putting solar on your roof, from cash to financing to lease or PPA and anything else in between. Solar contractors have different solar lease and PPA programs from different partners, it is the homeowner’s job to do their own math. Leases and PPA have become less popular in recent years as the public becomes more knowledgeable on the benefits of owning rather than lease or PPA. But for some people a
solar lease or solar PPA is the best, or sometimes only, option. The process of going solar can be somewhat complicated for homeowners whose individual situation is not an obvious fit for one model vs another. Keep in mind that installing a solar energy system on your roof is a significant expense and can have a significant positive impact on both your short-term and long-term finances. Because of this, the decision deserves research. Do your own math. Speak to your friends and neighbors who have gone solar, but keep in mind your situation may be different. Here at Baker we pride ourselves on providing unbiased information on going solar, even if it means losing business to a competitor with a better solution for your needs. We are happy to answer all your solar questions, even if you are not ready to go solar yet.