What is a Prepaid PPA?

For years there has been an ongoing debate in solar about whether it’s best to buy a system or opt for a power purchase agreement (PPA). The truth is there’s no right or wrong answer to that age-old question. There are pros and cons to each, and it really does depend on your situation.

But what if there was a solution that offered the best of both worlds? One that combines many of the financial benefits of buying your system outright with the peace of mind that comes with a PPA.

Sunrun’s Prepaid PPA might be just that solution.

In this post, we’ll explore this financing model, how it works, its advantages and disadvantages, and the types of homeowners who may benefit the most from it.

The Evolution of Solar Financing

The concept of harnessing solar energy isn’t new; however, the methods of financing solar installations have evolved significantly over the past few decades.

Early Installations

Initially, solar systems were predominantly purchased outright, which required significant upfront cost that typically paid off in about 7-10 years. Over time, various tax incentives were offered to soften that upfront cost but the need to come up with a large sum of money was still a barrier for the average homeowner.

Solar Loans

The introduction of solar loans allowed homeowners to install solar panels with little or no upfront cost, paying a monthly finance fee instead. This broadened access to solar energy but required them to take on debt and make a substantial long-term commitment. Dealer fees also increased the overall cost of the system by tacking on often hidden costs to the loan.

Power Purchase Agreements (PPAs)

PPAs emerged as a more flexible option, where homeowners agree to purchase the electricity generated by a solar system at a predetermined rate. This model provides zero upfront costs while transferring the maintenance responsibility to the solar company.

The Birth of Sunrun’s Prepaid PPA Model

Sunrun’s Prepaid PPA model represents a significant step forward in solar financing. In short, it takes all the maintenance coverage benefits of the PPA but the customer pays for the power the system generates in one upfront payment, rather than spreading out monthly payments over the 25-year life of the agreement.

In exchange for the cash-flow benefit of that upfront payment, the solar company discounts that overall cost, often by as much as the homeowner would have received in tax incentives had they purchased the system outright.

The customer then has no electricity bills for the duration of the agreement (unless their usage increases). The Solar company has a substantial cash inflow to help meet operating costs, and is also able to claim the tax incentives that come from owning the system.

How Does a Prepaid PPA Work?

Understanding the mechanics of a prepaid PPA can help homeowners assess whether it’s right for them.

• Initial Payment: Homeowners make a one-time upfront payment based on the projected energy production of the solar system.
• Electricity Generation: Over the life of the agreement, Sunrun guarantees the amount of energy produced, usually at a predetermined fixed price per kilowatt-hour (kWh).
• Performance Guarantees: If the solar system generates less energy than contracted, Sunrun refunds homeowners for the shortfall, within certain parameters, ensuring consumers receive what they pay for.
• Transferability: If a homeowner sells their house, the prepaid PPA can be transferred to the new owner, maintaining the property value and energy savings.

Pros and Cons of a Prepaid PPA

Like any financial product, the Prepaid PPA has its own set of advantages and disadvantages.

Pros

• Cost Savings: Homeowners often pay a lower overall price for electricity compared to both the monthly PPA option and traditional utility rates.
• No Monthly Payments: Eliminates the burden of monthly expenditures, offering financial predictability.
• No Escalator: Most monthly PPAs come with an escalator which increases the monthly rate by a few percentage points each year. Most solar companies have a 2.9% escalator (still a great deal compared to the rate at which Eversource’s rates go up), but Sunrun’s are typically 3.5%. Because it’s paid upfront, a prepaid PPA has no escalator.
• Maintenance-Free: Homeowners are not responsible for any maintenance issues or monitoring, alleviating concerns about system performance.
• Immediate Benefits: The upfront payment secures long-term energy savings and potential tax benefits, depending on local policies.

Cons

• High Upfront Costs: The lump-sum payment may still be prohibitive for some homeowners who cannot afford the initial payment.
• Less Flexibility: Homeowners are locked into a long-term contract, which can be less appealing if energy needs change.
• No Tax Credit: As with any PPA, any eligible tax credits accrue to the owner of the system, which is Sunrun.

Who Should Consider a Prepaid PPA?

Determining the best fit requires a nuanced understanding of homeowners’ specific circumstances. Here are key considerations:

People With Little-to-no Taxable Income

Solar tax incentives come in the form of a tax credit, not a tax rebate. The distinction is important because it often means that, if you don’t have enough taxable income against which to offset your credit, you may not be able to claim it (seek professional tax advice on this).  For this reason, retirees often benefit from a Prepaid PPA. They may not be eligible for the tax credit but they still get the benefit of it in the form of a substantially discounted rate.

People Who Plan on Long-Term Ownership

Those planning to stay in their homes for an extended period may benefit more significantly from the savings. If you think you might be selling up in a few years, do you really want to prepay the eventual buyer’s electricity bill?

Pople Who Like to Keep Things Simple

Homeowners who prefer a low-maintenance solution without having to worry about who to call if the system breaks might favor a Prepaid PPA. Also, people who don’t want the hassle of dealing with the IRS and the Mass. Department of Revenue to claim their tax credits.

What to Look for in a Prepaid PPA

Because of the similarity in name, it’s tempting to think you should be evaluating a PPA by comparing it to a monthly PPA. That’s not the case. In order to really see if the quoted price is a good deal, you should compare it to the cost of purchasing. That is the product that the prepaid PPA competes with most directly.

Get 2-3 quotes from competing companies on the assumption that you’re going to buy. Ask them to break out the gross cost and the net cost after tax credits. Only then should you ask Sunrun to give you a quote for a Prepaid PPA.

That quote should come in roughly the same cost (maybe slightly higher) as the best net quote you received for purchasing.

Final Thoughts on the Prepaid PPA

The Cape Cod Solar Guys have always worked on the principle that there is no right or wrong way to go solar, only what’s right or wrong for you. PPAs are a good product but they’re not for everyone.

Similarly, if you’re not eligible to claim the tax credits, purchasing might not be the best fit, either. The prepaid PPA might just be a great way to claim the benefits of that tax credit in the form of a greatly discounted rate.

In the Cape Cod market, 22-25 cents per kWh is a good rate for a monthly PPA on a home that needs no upgrades (compared to about 35c/kWh that Eversource currently charges). Discounting that rate even further by prepaying it becomes a really good deal if you have the means to do it.

Sunrun is one of several companies that the Cape Cod Solar Guys work with, so feel free to contact us if you are interested in exploring whether a Prepaid PPA is a good fit for you.