he interest in solar energy has exploded over the last few decades. The rising environmental awareness and spiraling electricity costs combined with a plunge in solar prices resulted in a massive global solar uptake. According to the 2022 Pew Research Center survey, 39% of American homeowners have seriously considered installing photovoltaic (PV) panels within the past 12 months - and that is even before the Investment Tax Credit was increased from 26% to 30%.
And still, many homeowners find themselves on the horns of a dilemma, whether to install rather costly solar panels to benefit in the long run or settle for rising energy bills to avoid large upfront expenses. Thankfully, there are options designed for those who wish to go solar without purchasing high-cost equipment, one being solar power purchase agreements (PPA).
What is solar power purchase agreement?
A PPA is an agreement between a power consumer and a power provider. The provider installs the photovoltaic system on the consumer’s property, retains ownership, bears full financial responsibility, and undertakes the necessary maintenance and repairs. Meanwhile, the consumer agrees to set up the system on their property and purchases the energy generated by solar panels from the provider during a specific time period.
A PPA most commonly specifies fixed energy prices, but sometimes it may include a predefined annual rate escalator, meaning the cost of the energy you buy will increase yearly. The percentages usually range between 2% and 5%.
PPA agreements are long-term, typically lasting for 15 to 25 years. However, they can be signed for only around six years - until the end of the tax benefit period. When the contract term expires, the customer can either extend the term or have the PV system removed from the property. Most solar PPA companies also offer a buyout option, enabling you to purchase the panels at certain predefined times during the contract term. Although PPA provisions widely vary, solar companies typically don’t offer buyouts before year 7 of the agreement.
How is PPA different from a solar lease?
Solar PPA is sometimes confused with solar leasing. Both solar financing options help bypass a hefty investment and make monthly payments instead. Just like PPA, a solar lease is a long-term agreement under which the solar installer owns the system it places on your property.
The difference is the billing mechanism: with a solar PPA, you pay a fixed price per kilowatt-hour (kWh) of power output, so basically, it works like your standard utility bill. Under a lease, you make fixed monthly payments for using the system; thus, it can be said that you rent it. While PPA will likely save you more money in the long run, with a solar lease, you will have fixed monthly payments that won’t change over time, which makes it easier to plan your budget.
If you’re choosing between installing your PV system or buying power from your solar company, consider the advantages of a PPA over purchasing a solar system, as well as the disadvantages. Let’s have a quick overview below.
A solar panel plant refers to a facility where solar panels are manufactured. These plants produce photovoltaic modules using various processes like silicon crystallization, wafer cutting, cell assembly, and panel framing. Major manufacturers operate such plants worldwide to meet the growing demand for solar energy.
Pros of solar PPA
No upfront solar costs
First and foremost, investing in your own PV system can be burdensome. Berkeley Lab's Tracking the Sun report states that a residential solar system averages $3.8 per watt before incentives or $19,000 for a typical 5 kW rooftop system. And even taking into account the incentives, many homeowners still can’t afford to purchase PV panels. Meanwhile, buying power from a solar company rids you of the large upfront costs.
Savings from the first day
With solar PPA, you can save on your energy bills from the first day as soon as your installer sets up solar panels on your roof. Buying a solar system, by contrast, implies a pretty long payback period: in the US, it takes about eight years on average for PV panels to pay off the initial costs.
Another advantage of the solar PPA is that you are relieved of the regular maintenance and upkeep, as your provider will be fully responsible for it. And if anything happens with the PV system, your solar company will take care of the repairs. With a purchased solar installation, you must take it all upon yourself.
Cons of solar PPA
Nevertheless, a PPA has its share of disadvantages. Most importantly, they offer much lower long-term savings. Even though they allow you to avoid upfront costs and the rates of solar PPA companies are lower than the utility rates, you will still have monthly energy bills. By contrast, a solar system can cover up to 100% of your power consumption, which means that you will be entirely energy self-sufficient as soon as you break even with your investment.
No solar incentives
With a PPA, you won’t be eligible for solar incentives, such as the federal tax credit equaling 30% of the costs of PV panels, as well as various local programs and rebates. Combining all the available opportunities can cut your installation costs by up to 50% if you choose to purchase a solar system.
Selling a home with panels installed through solar PPA is challenging
Apart from that, selling your home before the expiration of the agreement can be a tough job. The liabilities under the contract will have to be passed to the next property owner, and many buyers avoid taking on any extra obligations. So you will have to terminate the PPA to remove the solar system, resulting in an early termination fee.
Is solar power purchase agreement worth it?
Generally, a PPA provides an alternative financing option to homeowners looking to go solar without buying the panels. After you enter the deal, you can purchase electricity from the solar panel owner and pay for it at a fixed rate for each kilowatt-hour the PV panel system produces. This rate is lower than what your utility provider charges for the energy you would draw from the electric grid, which means guaranteed savings. However, PPA often includes an annual rate escalator, typically between 2% and 5%, meaning the rate can rise about 2% to 5% yearly during the entire duration of the agreement.
You should give thought to entering a PPA if you can’t yet afford to buy a solar system. Even though it is a less cost-efficient option overall, you will still be able to save on your energy bills. However, if your area has solid solar incentives and rebates, it is best if you opt for purchasing a PV system of your own.