Solar Lease or Power Puchase Agreement (PPA): Similarities and Differences
January 16, 2024 | Reading Time: 10 minutes
Solar Lease vs PPA
Leasing solar or participating in a Power Purchase Agreement (PPA) are alternative options to purchasing a solar energy system. Both agreements allow you to install solar on your property and utilize it’s energy, without the responsibility of maintaining the system yourself.
If you’re considering a PPA or solar lease, we broke down these agreements to help you decide which one is better for you.
Is a solar lease the same as a PPA?
While there are many similarities between leasing solar panels and participating in a PPA, they are different agreements.
Understanding each one is crucial to considering which option is more suitable for your specific needs, financial situation, and energy goals.
How is a PPA similar to a solar lease?
A PPA is similar to a solar lease because you as a homeowner, do not have worry about maintaining your solar system or future costly repairs. This is because the system is actually owned by the bank and you make monthly payments to them for the duration of the lease or PPA term.
Here are some other similarities between these two agreements:
The systems are installed for zero or few dollars down.
As opposed to purchasing a system where a significant deposit is often required before installation, PPAs and solar leases mandate zero or very few dollars down to install the system. This is helpful for homeowners who’d rather pay for their system in installments rather than up front. Homeowners who do not have deposit money or do not qualify for a solar loan should likely take advantage of a PPA or solar lease.
The systems are owned by a third-party.
Solar leases and PPAs involve a third-party (usually a bank) who technically owns the solar energy system. Despite the system being installed on the homeowner’s property, the system is possessed by the bank leaving all liability and authority to them.
The homeowner makes monthly payments.
Both PPAs and solar leases require homeowners to make monthly payments to the third-party owner for the set term.
100% of the energy produced is entitled to the homeowner.
PPAs and solar leases entitle 100% of produced energy to the homeowner. This means they have full access and usage of the energy their solar system creates. The third-party simply owns the equipment but generated energy belongs to the homeowner.
Maintenance and repairs are not liabilities of the homeowner.
A significant perk of leasing or participating in a PPA is that you are not responsible for the maintenance or repair of your solar energy system. The third-party owner is completely liable should the system need replacement parts or be altered in any way. This includes maintaining the panels, inverter, and all supplementary solar equipment.
Monitoring is conducted by the third-party.
In both agreements, the system will be monitored by the third-party owner. They will monitor it’s production and efficiency levels and ensure it is functioning at it’s highest capability. This can be a huge relief to homeowners who would rather an experienced entity oversee their system rather than themself.
Contracts are long-term (15-25 years).
Both agreements abide by contracts that typically last between 15 and 25 years. These are long-term agreements that are designed to save homeowners from the unpredictability of traditional electric bills.
Contracts can be easily transferred to a new homeowner.
If a homeowner moves within a contract term, they are typically required to pay off the remaining contract or transfer the contract to the succeeding property owner. This is an easy process and can impact the appeal of a home on the real estate market.
The homeowner does not have the right to claim financial incentives or credits.
Since the third-party has ownership over the system, the homeowner cannot claim tax credits or apply for any renewable energy incentives. Instead, the third-party has the right to do so and may utilize these financial rewards to decrease the cost of the system.
If the third-party does in fact, leverage financial incentives or credits, the homeowner’s monthly payment is not necessarily affected. It is up to the third-party if they would like to lower the homeowner’s monthly payments.
What is the difference between leasing a solar system and a PPA?
The major difference between leasing solar and a PPA is the payment setup. A solar lease involves a fixed monthly payment for a set leasing term. With a PPA, the payment is based on the monthly production rate of the system as the homeowner is contracted to a fixed price per kWh.
We’ve broken this down and outlined some more differences below:
Solar Lease: Fixed payments are made on a monthly basis throughout the leasing term. The homeowner will pay the third-party owner a set price every month until the contract is up. This price is determined by the third-party owner and has no contingencies on the energy production of the system.
In many cases, contracts will state an increasing annual monthly payment throughout the leasing term. This means that each and every year, the homeowner’s monthly payment will increase for the 15 to 25 year lifespan of the contract. It’s crucial for homeowners to read and understand their leasing contract before signing to prevent unexpected payment increases.
PPA: Payments during a PPA are determined by the amount of energy a system produces in one month. The homeowner will pay a set price per kWh and the monthly payment is calculated by multiplying the price per kWh by the amount of energy produced.
PPA payment structure allows for variation of payment amounts. It is actually unlikely that the homeowner will make the same payment from month to month, because all solar energy systems’ production rates fluctuate at different times of the year. It is typical for peak solar production months (March to September) to warrant a higher payment. While the price per kWh will not change, the payment will increase because energy production increases. There is a direct relationship between PPA payments and the energy production of a solar system.
PPA Payment Calculation Example:
|Price per kWh
System Performance Risk
Solar Lease: Since the payment does not change with varying energy production in a lease agreement, the risk of system performance generally lies with the homeowner. Therefore, despite the system aging and producing less efficiently, the set payment will not change and the homeowner may end up paying the same amount for less energy.
PPA: The PPA provider assumes the risk of the system’s performance in a PPA agreement. This is because the homeowner’s payment is correlated to the system’s energy production. As a result, the PPA provider heavily monitors the system to ensure it is operating at it’s maximum capacity and therefore, capitalizing the homeowner’s payment.
Maintenance and Ownership Specifics
In a PPA and solar lease, the system is typically maintained and owned by a third-party but small variations between contracts differentiate the exact terms. For example, a leasing contract may have a different procedure for repairing the system and replacing it’s parts than a PPA.
End of Contract Options
Solar Lease: At the end of the leasing term, a solar lease provides the homeowner with three options: extend the lease, buy out the system, or remove the system from their home.
Extending the lease would require the parties to re-sign or draw up and a new contract, pro-longing the leasing period.
Buying out the lease involves the homeowner compensating the third-party for the system’s fair market value and assuming full ownership and responsibility for the system from that point forward. In many cases, the third-party will no longer monitor or insure the system’s performance and the homeowner will essentially be on their own for repairs and maintenance.
The final option is to have the system removed therefore halting the homeowner’s utilization of solar energy.
PPA: At the end of the PPA term, the homeowner may choose to renew the contract, purchase the system, or have the system removed.
Renewing the contract initiates a new term and the homeowner will continue to pay based on a per kWh production rate.
Purchasing the system gives full ownership to the homeowner, but ultimately costs them more money as the monthly payments they made throughout the term did not count toward the system’s cost and the homeowner must purchase the system at the fair market value.
The final option, removing the system, may occur at no extra cost but discontinues the home from running off solar energy.
Special Lease and PPA Options
Prepaid Solar Lease
Homeowners have the option to prepay their lease in full at the start of the contract. This relieves them from making monthly payments during the agreement term but still requires the third-party to monitor and maintain their system.
In many cases, prepaying a solar lease simplifies the transfer process to a new homeowner as they may assume the solar system’s benefits without payment for the remainder of the term.
A Flex PPA is a variation of a PPA that divides the projected yearly production of the solar system by 12 months and determines a fixed monthly price for the property owner. Despite varied production rates through out the year, your monthly payment will not change.
After five years, Flex PPAs give the property owner the legal right to buy the remainder of the contract and own the solar system if they want. This program essentially allows for a “lease to own” solar energy system pipeline and prevents property owners from paying increased or unpredictable monthly payments they may experience in a regular lease or PPA.
In a prepaid PPA, the homeowner pays the full (usually discounted) cost of the PPA upfront, alleviating them from payments throughout the term. This agreement typically offers favorable PPA terms for the homeowner since all the risk is on them. Therefore, it’s likely the contract will state minimal production rates that the PPA provider must insure of the system.
Other Frequently Asked Questions
Why would a bank want to take on a solar lease or PPA?
There are several reasons why banks are interested in financing solar leases or PPAs. The appealing qualities of these agreements include:
- The contracts are a stable, long-term investment
- Solar energy projects are generally low-risk
- There are thousands of dollars in government incentives
- There’s a growing demand for renewable energy and participating in these projects can position them as sustainable and environmentally responsible
- The contracts can diversify their investment portfolio
- These projects can help them reach their Environmental and Social Governance (ESG) goals
What are the advantages of a solar lease or PPA?
Solar Lease: A solar lease provides homeowners with a productive solar system, fixed monthly payments, and zero responsibility of maintenance or repair. A small or nonexistent upfront cost is a big advantage to homeowners who want to make the switch to solar but don’t have the upfront money to purchase one.
PPA: A PPA ensures a homeowner’s solar system is maximally efficient. It is beneficial for people who do not have downpayment money as the system is usually installed at no cost. It allows home’s to run off solar energy without burdening the homeowner with the responsibility of up-keeping the system.
The Flex PPA option also gives the homeowner the legal right to purchase the system after five years.
What are the disadvantages of a solar lease or PPA?
Solar Lease: A solar leasing agreement can be very difficult to end early and there is often an early buy-out fee if the homeowner wants to terminate the contract.
Leases can also deter homebuyers from a home on the market because a lot of people do not want to assume leasing payments in addition to new mortgage costs and other monthly fees that come along with buying a new home.
In addition, leases can contractually bind homeowners to pay more per month on an increased annual basis for the duration of the term. This essentially forces homeowners to be paying more for the same amount of energy by the end of their contract.
PPA: PPA payments are difficult to predict and can vary widely. Therefore, homeowners may end up paying more in sunnier months than they would have if they stuck with traditional electricity.
Why should I lease or PPA my solar system instead of purchasing it?
You should consider a PPA or solar lease if you:
- Are not eligible for the Federal Tax Credit or other significant solar incentives
- Do not plan on staying in your home for a long period of time
- Do not qualify for a solar loan
- Would rather not assume ownership and liability of your solar energy system
Do my solar lease or PPA payments go toward the cost of the system?
No, in most cases your PPA or solar lease payments do not go toward the cost of the system. In the event of a system buy-out at the end of a contract term, the system is usually sold to the homeowner at a fair market value. Therefore, you do not build equity on your system by making lease or PPA payments. Instead, you’re essentially paying for the right to utilize the system’s generated power.
How do I know if a solar lease or PPA option is best for me?
At Isaksen Solar, we typically recommend a Flex PPA. This is because you’ll have fixed monthly payments and you’re given the option to buy the system after five years. You are getting the best aspect of a solar lease option (fixed monthly payments) and the best aspect of a PPA option (ownership) making the Flex PPA one of the smartest alternative agreements to purchasing a solar system.
Of course, every situation is different and we recommend you reach out to us so we can provide you with a custom recommendation based on your needs and goals.
We’re Here to Help
We’re happy to answer any of your questions about solar leasing or PPA options. Give us a call, (508) 717-3820, or request your free quote.