olar energy continues to grow in leaps and bounds, with more and more homeowners and businesses taking an interest in setting up photovoltaic panels. This is hardly surprising, given the myriad environmental and financial benefits of the sun’s power.
However, high upfront cost remains the biggest obstacle to solar uptake by a large margin: 36% of those hesitant to go solar cite the initial investment as a major barrier, a Forbes survey reveals. Luckily, alternative financing options allow households and companies to switch to clean energy without making a dent in their budgets. Today, we’ll take a look at solar PPA agreements – one of the most common solar energy financing models.
What is a solar Power Purchase Agreement (PPA)?
Before getting into the details, let's unpack the definition first. Solar Power Purchase Agreement is a long-term contract under which a third party – a developer – is fully responsible for purchasing solar equipment and installing it on a customer’s property at no cost to them. The developer retains ownership of the system and allows the customer to use the energy it generates, charging a specific fee for it.
According to the Database of State Incentives for Renewables & Efficiency (DSIRE), solar PPA contracts are currently available in 29 states plus Washington. Check the map on the DSIRE website to see if your state has PPA agreements.
Plugging into solar with a PPA agreement: how it all works?
To enter a power purchase agreement, a homeowner signs a contract with a solar company. Agreement duration may vary, but PPA usually lasts 15 to 25 years. In most cases, the client doesn’t have to pay anything upfront, as the third-party developer bears the full cost of equipment and its installation on a homeowner’s rooftop. Moreover, the developer takes care of all the pre-arrangements, such as PV system sizing, site preparation, and getting all necessary permits and approvals. Once the panels are installed, the developer connects the system to the local power grid.
The solar array generates clean energy and powers a customer’s home, allowing them to cut down on their electricity bills. In exchange, they pay the developer a set rate for each kilowatt-hour (kWh) of electricity the solar panels produce. In simple terms, a homeowner doesn’t buy the photovoltaic system itself but the energy this system generates.
The rate a developer charges for the electricity from PV panels is usually considerably lower than one normally pays a utility company for the electricity from the power grid. However, most PPA contracts imply that the amount a homeowner pays for energy will increase annually at a predetermined rate, this mechanism is called a price escalator.
Isn’t PPA the same as solar lease?
A PPA should not be confused with a lease. Indeed, these financing options share some similarities. In both cases, a developer retains the ownership of a solar system, and a customer uses the energy from this system to power a home.
However, solar PPA and solar lease use different pricing principles. While with a PPA solar energy contract, you pay a fixed price per kilowatt-hour of electricity generated, with a lease, you pay a fixed monthly “rent” in return for the use of the photovoltaic panels – basically, the process is very similar to leasing a car.
So which of the two alternatives is more advantageous? In fact, you can benefit from both; the choice of a financing option is only a matter of preference. If you would like to pay the same amount every month to make your budget planning easier, a lease is your option. Conversely, if you only want to pay for the electricity you consume, a PPA might be a better choice.
Pros of a solar PPA
PPA agreements can fill the needs of homeowners wishing to use solar energy and save on electricity bills but avoid significant initial investments. Here's a rundown of key advantages a PPA can offer.
Clean and sustainable energy
The first advantage of a PPA over using power from the utility grid is that solar is a renewable and clean energy source. Unlike fossil fuels, photovoltaic panels release negligibly low amounts of greenhouse gases when operating, and the PV panel’s carbon footprint is about 20 times less than that of coal-powered electricity sources. So if you want to shift away from fossil fuels without buying and installing costly PV panels, a PPA can offer that.
Low to no down payment
Most solar PPA contracts offer a zero-down payment, meaning you won’t have to pay anything until the installation starts producing electricity. However, a PPA can also be structured with a down payment to reduce the unit price a customer will pay for solar electricity.
Reduced energy costs
Even though your long-term savings won’t be as massive as they could have been with your own PV panels, you will still save quite a bit on electricity bills. According to the Energy Information Administration (EIA), the average monthly electricity bill for residential consumers in 2021 was $122. As a rule of thumb, PPA prices are 10% to 20% lower than utility rates, which means you can save up to $24 monthly or $288 annually. If you multiply this figure by the years your contract lasts, you’ll see that the total savings are substantial.
Since a developer retains the ownership of a photovoltaic system, it is their responsibility to maintain and service it. And naturally, if something needs to be repaired or replaced, the developer will manage the process and bear all the costs.
It would be fair to say that PV systems usually need very little maintenance – it is generally limited to quick inspections and easy cleanup once or twice a year. But still, getting rid of this hassle is another nice bonus of a PPA.
Cons of a solar PPA
Of course, solar PPA agreements aren't without flaws. Let’s quickly go over the main ones so that you can decide whether they outweigh the advantages in your particular case.
Lower savings than with your own solar system
A solar PPA can help you trim your electricity bill, but the savings can never compare with solar ownership. While PPA reduces an annual electricity bill by up to $288, PV panel ownership saves an average American family around $2,200 annually. Over the entire lifetime of a PV panel system, the savings can amount to approximately $30,000.
No solar incentives
Federal and local governments offer a slew of incentives to encourage homeowners to plug into solar power. For example, the Solar Investment Tax Credit (ITC) will cut the cost of installing rooftop systems by as much as 30%, and adding state and local incentives and rebates can slash the price of a PV installation by up to 50%. With a PPA, by contrast, it is your installer who benefits from the incentives.
Annual energy price escalator
Most PPA agreements include an annual price escalator, which means the rate you pay for energy will increase each year for the entire duration of the agreement. These escalators typically range from 1% to 3%, but in some cases, they can reach up to 5%. This creates a risk of overpayment: the pre-contracted electricity cost can end up being higher than the utility rate if retail prices decrease or grow more slowly than the escalator.
Selling a home with PPA may be complicated
Buying a solar system boosts your property value. Homes with photovoltaic modules sell for around 4% higher on average than homes without solar, as potential buyers are lured by lower energy bills and reduced carbon footprints. A PPA solar energy contract, on the other hand, has no impact on your home value. In fact, it can make selling it even more complicated, as you will have to either transfer the obligations under the contract to a new property owner (which most buyers prefer to avoid) or terminate the contract for an extra fee.