Solar Power Purchase Agreement
What is a Power Purchase Agreement?
A Power Purchase Agreement (PPA) is an alternative way to finance a home solar system.
In this agreement, a homeowner pays for the electricity that their home consumes from the energy produced on their rooftop solar. The system is installed by a solar contractor for little to no upfront cost. Essentially, the installer takes the place of the utility by providing solar energy to the homeowner who pays the installer for their energy usage at a lower rate than what the utility charges.
Note that the homeowner may still need to pay the utility for usage that the solar system wasn’t able to cover at night or whenever the home is using more energy than the system is able to produce.
What Are The Costs Associated With a PPA?
The main reason PPAs exist is to allow homeowners to source clean energy with little to no upfront costs and without having to own the system.
However, there are different types of PPAs to be aware of.
A reputable solar company offering you a PPA should very clearly inform you of the price per kWh as well as any increases or “escalators” there may be over time.
Be mindful that many companies offer fairly low “starter” rates, for example, $0.155/kWh, with no money down if you qualify. However, the contract often includes an annual rate escalator, usually between 1-2.9% per year, for the entire duration of the PPA (which can range from five to 25 years). While this may not sound like a lot, it can equate to thousands more than a flat-rate PPA over the course of the agreement.
What are the Cons to a PPA?
A PPA does lower your energy bills at the beginning of the agreement, but overtime that may not be the case.
When you have a PPA with an escalator, the rate can become higher over time creating a scenario where one is locked into a 20-25 year agreement in which near the end, the homeowner is paying higher rates than what the utility charges.
Some installers prefer a PPA because the installer will get to claim the 30% federal tax credit on the project, while also receiving monthly payments for work that takes one day to install. Be wary of installers that begin the solar conversation with a PPA — many times those are the installers that do not have the homeowner’s best interest in mind since the installer benefits more from a PPA than if a homeowner purchases their system.
What are the Pros to a PPA?
PPAs can be helpful for homeowners that do not plan on staying in their home for a long time but still want a lower rate for their electricity. The little to no upfront costs are also an attractive feature of a PPA. Homeowners that don’t want to worry about owning or replacing faulty equipment also find value in a PPA.
How is a PPA different from a Solar Lease?
Solar Leases and PPAs are practically the same; it will ultimately depend on the type of Lease or PPA that a solar installer is providing. Typically a lease entails monthly payments at a fixed rate (that may increase over time) while PPAs charge based on $/kWh a homeowner uses from the system on their roof.
When looking into solar options, be sure to research each option and price it out based on the lifetime of the contract for a PPA, lease, financing, and purchasing.
The bottom line
Solar PPAs are one route to clean electricity and energy cost savings. However, they typically offer lower lifetime savings than owning a solar system and have been known to complicate home sales.