Are Solar Leases and PPAs The Same Thing?
Yes, leases and PPAs are basically the same in that a third party owns, maintains, and insures your solar panel system. The leasing company gets the Federal tax credit and passes the savings on to you. For a lease, you pay a monthly fee to “rent” the solar panels. For a power purchase agreement, you buy the power produced at a discounted rate. Be careful of annual payment escalators as they can outpace utility rate hikes. You can opt for a zero escalator option that costs more upfront but saves money over the lease term. Terms are typically 20 to 25 years.
When Do Solar Leases and PPAs Make Financial Sense?
Why would homeowners choose solar leases or solar PPAs? If you can’t take the tax credit, or don’t want the hassle getting a solar loan, filing for the tax credit, or maintaining your system, then leases and PPAs are worth your consideration. A good solar lease or Power Purchase Agreement should have a payment that saves you 25% vs your utility bill. By providing low-cost solar energy at a fixed monthly cost, you will save more as rates rise over time. Many installers don’t have access to solar power leases, so they won’t share the benefits of leasing solar systems. It’s a mistake to assume that everyone can take the Federal Tax Credit for solar.
Financial Benefits of Leasing
Solar leases and PPAs offer immediate savings over loans and cash purchases. The solar leasing company takes the tax credit and passes along the savings with lower monthly payments or upfront discounts. The price of electricity on a solar lease agreement should be lower than the utility rate on your utility bills. Before you sign, here’s what you need to know about solar leases and PPAs, and how they differ from buying.
Fixed Rate vs. Escalating Rate
Over the lease term, solar leases and solar PPA’s can adjust upwards annually with an escalator. Unlike other solar financing options, which are fixed. If you plan to be in the home for the long haul, opt for freezing your payment for 20-25 years. You pay a little more upfront, but you’ll save significantly more with a lower price per kWh over time. The leasing company, such as SunPower, Sunrun, or Vivint, installs it, insures it, maintains it, and monitors it. They guarantee the solar’s performance and will pay you if it underperforms. If you read my post about SunPower panels, you know you’ll get premium solar panels with a SunPower lease. With the other leasing companies, ask for the brand of solar panel you’ll get before signing.
Design Review & Production Guarantees
A benefit of third party ownership is that the system design and installation are scrutinized by the solar leasing company. These are big, stable solar and renewable energy companies, so there’s less concern about your contractor going out of business. You can be sure the production will match your contract, or you’ll be paid for the shortfall. Companies like Sunpower, Sunrun, and Vivint control the design and the solar energy installation process to guarantee that the system will produce the power that was promised. The lease contract has a production guarantee for a specific period of time. The production guarantee makes sure that you’ll see energy savings on your utility bills.
The Most Cost Effective Solar: The PrePaid Lease
One of the lesser-known leasing options is the pre-paid lease. This is the cheapest way to buy solar. You are given the tax credit as an upfront discount from the leasing company. Plus you never have to worry about maintaining the system or filing for the tax credit. You pay a lump sum for the solar, and it is discounted by the amount of the tax credit.
Is There A Difference Between A Solar Lease And A PPA?
In practice, there isn’t much of a difference, especially since PPAs have become more lease-like in fixing their payments. Basically, you lease the solar panels with a solar lease and keep all the energy they produce.
With a solar PPA, you buy the energy the solar panels produce at an agreed-upon rate. Theoretically monthly payments would fluctuate since seasonal weather affects production, but most PPA’s now have equal payments throughout a 12 month period. They typically adjust upwards annually with a cost of living adjustment or escalator ranging from 0 to 3.9%.
Ask your solar company for a copy of your solar contract before signing to see if there are any upfront costs or down payments required and if the monthly lease payments are fixed for the long term. Zero down, fixed leases with no price escalators are the wisest choice for most homeowners.
Will Solar Leases & PPAs Affect Net Metering With My Utility Company?
The big utility companies don’t care where your solar power comes from or who owns solar energy systems. It doesn’t matter if you bought your solar energy with a solar loan, cash, or any other program. They do require a copy of your solar contract to be submitted for Net Metering, but this doesn’t affect net metering rates at all.
End of Lease: What’s Next?
Typically the leasing company gives you the option to renew for a short term, or to purchase at a fair market value determined by an appraiser or per contract. You can also ask the solar contractor to remove the system from the house, and if you do, they might offer the system to you for a minimal cost. They must restore your roof to pre-solar conditions, and most don’t want to do that. You get no investment tax credits if you buy the system at the end of term.
What Happens if I Sell My Home?
Both residential solar loans and leases have gotten better when it comes to transferring property. Because there is a UCC filing for signature loans as well as PPA’s and leases, and a tax lien for PACE loans, the escrow process will handle payoffs or transfers. For most leases, selling the home triggers a purchase option, and your home’s buyer can add it to their mortgage, or they can take over the lease/PPA. This usually involves qualifying for it, which is a very simple process.
I Don’t Want To Lease It, I Want To Buy It
Many homeowners hate leases and prefer to buy regardless of their ability to take the tax credit. Many homeowners reported bad experiences with companies such as SolarCity and their leasing programs, especially when selling their homes. This tarnished solar leasing and PPA’s, but these issues have been addressed by companies such as Sunpower and Sunrun. They have dedicated departments for when a home is sold, or a mortgage is refinanced. However, if you are adamant about buying your solar, check out our Guide to Solar Financing to see if a solar loan or cash option works for you.
Which Is Better? Solar Lease Or Purchase Agreement?
Are solar leases and PPAs better than solar loans or cash purchases? You can have a premium solar panel with microinverters in a solar PPAs or solar lease systems, depending on the solar company. With affordable monthly payments, no debt on your credit report, and zero up front cost, you will get a solar installation by a national solar company or one of its authorized partners that gives you access to clean energy with a cost of electricity that’s lower than most local utility companies. The final conclusion comes down to your ability to take the tax credit and your tolerance for service and maintenance headaches.