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What’s the difference between a solar lease and a PPA (power purchase agreement)

difference between a solar lease and a PPADear Solar Fred,

What’s the difference between a Solar Lease and a PPA?

-Confused in Cali

Dear Cali,

You’re right to to be confused because they’re similar…yet very different. I outlined each option and others in my Cash Poor Series of posts, so you can see an outline of each program there.

Update Feb 27, 2014: Solar Leases have been for years now, but in the latest of those years they mostly come with performance guarantees, which can make the difference between them and many power purchase agreements almost semantic. In short, this article will well explain the differences, but in practice, none of this should matter and whether it’s a lease or PPA probably won’t affect your decision making. What WILL affect your decisions is the bottom line guaranteed cost to you each month and the bottom line value of the electricity is promised to produce every month. If you’re getting a quote for a solar lease and also one for a solar PPA, each will break it down to monthly guaranteed costs and savings so… who cares whether you’re paying for the electricity or renting a piece of equipment that happens to produce free electricity?…. what you call that agreement doesn’t matter all that much”

Solar lease vs a PPA (Power Purchase Agreement)

Solar PPA:

  • Solar PPA stands for solar “Power Purchase Agreement.”
  • PPA gives you a low ($1000 or more) up front cost.
  • You’re locked in for 15 to 18 years to this agreement, which is transferable to a new owner or home.
  • They charge you a set electrical rate that is sometimes flat, and sometimes calculated to rise over the term of your agreement. So instead of paying for coal fired electricity rates, you’re paying for PPA rates generated through your solar panels.
  • The PPA company takes care of the maintenance and any needed repairs and monitors your system.
  • You don’t get any tax benefits or State rebates or Renewable Energy Credits (RECs).
  • You usually have some kind of option to buy later or at the end of the agreement for a set price per watt. Sometimes this is negotiable (and you should at least try since used solar panels aren’t worth much.)
  • You need to have an excellent credit rating to qualify.
  • You’re always tied to the grid, so any residual electricity needs that your solar panels don’t produce is covered by your utility.

Solar Lease:

  • There is usually no down payment, so 0 down.
  • You’re locked into 15 years or more years, which is transferable to a new owner or home.
  • In a solar lease, vs. PPA, you do NOT pay for any power that your solar panels generate.
  • Instead, you pay a lease payment plus any extra power you need buy from your electric company. So, solar panel power is technically free, but you have a set lease payment that rises 3 to 4% a year. That’s typically less than the 5% rate increases by your electric company. Some programs, like the CT Solar Lease program, is a flat rate, so no yearly increases.
  • Like a PPA, they may take care of maintenance and repairs and monitor your system, but that’s not always the case.
  • Similarly, you don’t get tax benefits or rebates or Renewable Energy Credits (RECs).
  • Like PPA’s, you have an option to buy later or at the end of your term for a set residual price. You should try to negotiate the Fair Market Value (FMV) at the end of the lease, as used panels ain’t worth much more than the cost of taking them off your roof.
  • You need to have a good to excellent credit rating also, depending on the program.
  • Also like a PPA, you’re always tied to the grid, so any residual electricity needs are covered by your utility.

So, bottom line for a solar lease vs. PPA:

  • PPA, you pay for power generated by solar panels with some money down and flat or yearly increases on your PPA electric rate. You also benefit from tiered rates.
  • Lease, you have no money down (typically) and pay a flat leasing fee that rises every year by a certain percent, plus left over utility bill. You also benefit from tiered rates.

While both these options are good for low cost financing, there’s not a huge difference when it comes to a solar Lease vs. PPA. If it saves you money and you like what you see, go for it.

Either way, you have nothing to lose by getting a quote from these various companies and comparing the financial pros and cons. Some companies can give you both options, so you can compare solar leasing/solar ppa with purchasing.

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12 thoughts on “What’s the difference between a solar lease and a PPA (power purchase agreement)

  1. Anonymous says:

    2 points that haven’t been taken into account. I’ll concede that I don’t know the exact numbers, but I know that they should factor into the equation.

  2. tom says:

    The link for “energy efficiency mortgage” is broken, you forgot the slash after com.

    1. Dave Llorens says:

      Fixed, THANKS!!!!

  3. Richard says:

    Do you guys have any idea what the Big Island of Hawaii is paying for residential energy right now $0.42 kWh while a good majority of the country is closer to $0.10 kWH. Every option out there is better than Hawaii’s rates (and the rates are only going up). I looked at three options for a PV system. PPA zero down with a fixed effective $0.30 kWh for 20 years. PPA Prepaid with an effective rate of $0.09 kWh for 20 years. Outright purchase of the industries best system with an effective rate of $0.075 – based on a 25 year period. The outright purchase gives me more flexibility for future changes to the system, but I really didn’t need additional tax credits, so the Fed and State credits really did me no good – even rolling over for 5 years. The Prepaid PPA gave me a great kWh rate, I didn’t have to deal with the tax credits, and my system is monitored, insured and maintained for 20 years. All I really want is to buy power at a fixed low rate, and I don’t really care that I don’t own the system.

  4. Charles, I really can’t. I think the short answer is that it’s going to vary from state to state, but the best thing to do is to talk to your state’s tax authority. Very few accountants are familiar with what solar PPAs and leases are, let alone their tax treatments. Sorry I can’t be more help.

  5. Charles says:

    Solar Fred – can you comment on differences in Sales Tax treatments for PPA’s and Leases? Are both subject to sales taxes?

  6. Noah says:

    But it the solar provider sells you the system at the end of a set period, aren’t they subject to depreciation recapture – negating the depreciation tax benefits?

  7. WoV says:

    25% (actually a bit better) savings to the provider, who then *could* pass it on the customer – you assume it doesn’t get passed on but that’s not a universal truth, just an assumption. It certainly *could* and whether or not it *does* depends largely on the degree of competition between SolarCity, SunRun, Sungevity, whomever else enters the space, and the various PACEs. That I think will step up in the near term.

    You come at me for trying to convince you that you’re financially better off; I’m not. What I’m saying is it seems that when you’re doing your estimates on a sort of intuitive basis (“well, you’re paying the finance provider for their cash and value-add so it will always be more than HELOC or PACE”) you have to incorporate another factor – “though, they do have depreciation savings and PACE does not…”

  8. WOV says:

    SolarFred, you’re missing one factor in just assuming you’re financially better off with a home equity loan or PACE than with a solar lease or PPA. True, you’re paying likely higher interest rates and giving a margin on finance to the leasing company – but unlike with a HELOC or PACE-backed cash purchase, the solar provider, as a corporate taxpayer can monetize depreciation, which can knock down the price 25% or more…

    1. WOV, knock the price 25% off more for WHOM? The solar provider or the customer? The solar provider, really, increasing its profits. I’ve never see that benefit worked into the solar lease or PPA estimates that my friends get. Again, they do save customers SOME money, but if you are a long term thinker, you’re much better off owning through a home equity loan or through a PACE program. Especially PACE, if you plan to move before 15 to 18 years, or what every the lease/PPA term is.

      I don’t mind Solar City, Sun Run, and other solar leasing companies making a profit for taking the up front risk and providing a solar service that home owners don’t have to think about. That has value. But until I see apples to apples comparison that show that consumers would save more on leasing/PPA than on HELOC or PACE, it’s fruitless to convince a solar educated person like me that you’re financially better off with a lease or PPA than with HELOC or PACE. Sorry, but facts are facts. I would suggest transparency and a different service/communication angle than claiming more savings.

  9. Tor a.k.a. "Solar Fred" says:

    Thomas, you are absolutely right. You are always connected to the grid for any excess power that you need. These are never battery based/off grid financing options. I've corrected in the post. Thank you for pointing out.

  10. Thomas says:

    Why doesn't the PPA require you to have an electric bill for the excess power needs as well ? Seems the same regardless of Lease or PPA option …

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