Is a Solar PPA Right For You?
Last Updated February 16, 2024
By Michael Jones
Michael literally wrote the book on solar (it’s called The Homeowners’ Guide to Going Solar) and has been a solar consultant for over four years.
So, you’re thinking about a solar PPA (power purchase agreement) but you’ve heard from some people that they’re not the best way to go solar.
That’s not exactly true. For some they’re not the right option but for others they’re a perfect fit.
In this article, we’ll clear up some of the misconceptions around solar PPAs, examine their pros and cons, and figure out if one is the right choice for you
What Exactly is a Solar PPA?
A Solar PPA is long-term agreement between a homeowner and a solar company, where the homeowner gets to purchase solar energy from the panels on their rooftop at a set price for an agreed length of time.
The homeowner doesn’t actually own the solar system and does not pay any money upfront for its installation. All they have to do is provide rooftop space for the panels and agree to buy the power the system produces for as long as the agreement is in place.
The rate, plus any agreed rate increases over the term of the agreements, is all spelled out ahead of time. That way, the homeowner can have both a cheaper rate for their electricity and the certainty of knowing what that rate is going to be throughout the term of the agreement.
Meanwhile, the solar company is responsible not only for installing the system, but for maintaining it and upgrading any components that may wear out over the agreement’s term.
Pros of Solar PPAs
The best part about a solar PPA? You don’t have to pay anything upfront. This change has let countless folks who couldn’t afford it before, make the switch to solar power.
With a solar PPA, you can keep your electricity costs in check. It’s like locking in a fixed rate for power throughout the contract term, so no worries about sky-high price hikes.
On Cape Cod, three recent price hikes pushed electricity rates up by 62% in the the space of twelve months. Anyone who signed a PPA before the first of those rate increases would have been protected from them.
Another great thing about solar PPAs? You don’t have to stress over system repairs and maintenance. It’s all handled by the solar company—they own, operate, and repair the system, if needed, throughout the entire term of the agreement.
On top of that, since the system is monitored around the clock online, the company likely catches any hiccups before you even notice them. And since the company is only being paid for the power that’s being produced, you bet they’ll be highly motivated to quickly fix any issues with your system.
Cons of a Solar PPA
The main issue with a solar PPA is that you’re not going to save as much money in the long run compared to buying your own system. You won’t qualify for any tax breaks either from Uncle Sam or from your state government and any available net metering credits from your local utility company are off-limits too.
That doesn’t mean you won’t see the benefit of these incentives. It’s just that they’ll accrue to the solar company and then be passed on to you in the form of a cheaper electricity rate.
Another thing to watch out for with PPAs is that prevailing utility rates may drop and you’re stuck paying a PPA rate that is actually higher than your non-solar neighbors. Honestly, though, chances of this happening are lower these days than they used to be.
Utility costs are going up, not down, and that’s a trend that’s likely to continue. So as long as you can lock in a solar PPA rate that’s at least 20-25% lower than current utility rates, it’s pretty unlikely you’ll ever find yourself paying more than your neighbors.
A third potential problem with a solar PPA is if you decide to sell your house, and the new owner isn’t into having panels. If those panels are taken down before the usual 20-25 year contract wraps up, someone is going to have to pay an early termination fee – either you or the new homeowner.
But again, these days, it’s rare for potential home buyers to shy away from solar. Most people are quite familiar with the benefits of going solar and are far less likely to push for getting rid of a perfectly good system that’s giving them cheaper electricity.
In fact, your system is far more likely to be a good selling point.
Solar PPA vs. Other Solar Finance Options
Solar PPAs are getting more popular these days, but they’re not the only way for people to go solar. Broadly speaking, there are four different ways to go. You can either buy your own solar system, either paying cash or taking out a solar loan, or you can choose a third-party-owned program (TPO), opting for either a lease or a PPA.
Since we’ve talked a lot a PPAs already, let’s unpack the pros and cons of each of the other options.
Putting cash down for a system means that you will almost certainly save more money. If your system means 100% of your electricity needs, you’ll no longer have to worry about paying a monthly power bill. And you may also be entitled to tax incentives and net metering credits to help offset the cost.
Then, depending on how much you paid for your system and the going rate of electricity from your provider (the monthly cost you now don’t have to pay), your setup should break even in roughly 5 to 8 years.
However, having the cash ready upfront is a tall order for many homeowners, and if anything goes wrong with your setup or it gets damaged, fixing it falls squarely on you.
For homeowners that want the benefits of ownership – tax incentives, net metering credits, etc. – but have the cash to buy a solar system outright, there’s the option of using a solar loan. Most solar companies have relationships with lending partners who have loans that are tailored specifically to the solar market.
But solar loans often come with hefty dealer fees.
These are significant additional cost that are added to the cost of the loan, rather like points on a mortgage. trouble is, rather than the 2 or 3 percentage points you might see for a mortgage, dealer fees can add a whopping 25-35% to the cost of your loan.
And even if you pay off the loan early, while you’ll save on interest payments, you’ll still have paid these dealer fees because they’re added to the loan at origination.
Leased Solar Panels
In the world of solar energy, you’ll often hear people use the terms “PPA” and “lease” interchangeably – it’s easy to see why since they are very similar.
With both options, you can switch to solar energy smoothly and without paying any money upfront. Both plans also offer a stable monthly fee through long-term contracts, with the bonus that it’s up to the solar company, not the homeowner, to handle repairs and maintenance.
And neither option offers homeowners direct tax breaks or net metering credits. Instead, all those benefits go straight to the solar company when you’re dealing with third-party ownership agreements.
But there is a key difference between PPAs and leases. When you lease, your cash goes towards a monthly fee for the use of the solar company’s equipment – just like when you lease a car. With a PPA, what you’re really buying is the energy that equipment generates.
So with a lease, your monthly payments stay he same each month. If you have a 7kW system (around 20 panels or so), it’ll be the same next month as it was last month. You pay by the kW for the capacity of the system.
With a PPA, your pay by the kilowatt-hour (kWh) for the energy produced. So when the system generates more power in the summer months, your bill will be higher, while winter typically brings less sunshine and lower bills.
Recently, some solar companies, most notably Sunrun, have rolled out something called a levelized PPA. It takes the year’s total estimated output and divides it into twelve equal monthly payments – simplifying budgeting for homeowners but also causing confusion because it looks even more like a solar lease.
Questions to Ask Before Signing a Solar PPA
While you can’t really haggle over most parts of a solar PPA (like how long it lasts, what happens if you want out early, or guarantees about power output), there are one or two of the terms that might be up for negotiation. There might be some flexibility in the pricing, the accelerator rate, and how to cover the cost of any home upgrades that might be needed.
Before signing up for a solar PPA, it’s crucial to ask some important questions:
- What is the solar company’s rate per kilowatt-hour?
- Given your current or expected usage, how much does that work out at each month?
- Is it at least 20-25% lower than what you’re currently paying the utility company?
- Does your solar PPA have a clause for yearly rate hikes? If yes, what’s the percentage increase each year?
- Does the solar company guarantee that the system will produce the amount of electricity they say it will? What happens if it doesn’t?
- If home upgrades are needed, how does the cost of them get covered?
- Are you able to buy out the contract before the end of its term?
- What happens when the contract ends?
Your solar consultant should be able to answer these questions to your satisfaction before you sign a solar power purchase agreement.
Final Thoughts on the Solar PPA
You’ll find no shortage of internet solar “experts” who will tell you that solar PPAs are a scan and that you should “always buy, never lease”. The truth is there is no right or wrong way to go solar, only what’s right or wrong for you. And there are plenty of reasons that a solar PPA might be the right way to go.
Solar PPAs, if set up properly, can be a real money-saver over time because they give you clean energy that’s cheaper than what traditional power companies offer. They can be a great option for homeowners who want to go solar but don’t want to take on too much risk or financial burden.
The job of a good solar consultant is to help you to determine if a PPA is the right way for you to go solar. If you’d like an informative, no-pressure chat with either of the Cape Cod Solar Guys, you can contact us here.
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