What is a Solar PPA and is it right for you?
Solar power purchase agreements (PPAs) have become an increasingly popular option for homeowners who are looking to go solar but who either can’t or don’t want to pay the upfront costs of purchasing their own system. But what is a solar PPA?
In this article, we’ll take the mystery (and fear) out of solar PPAs and help you determine whether one is right for you.
What is a Solar PPA?
A Solar PPA is a contract between a homeowner and a solar company that allows the homeowner to buy clean, renewable energy generated from solar panels on their roof at a fixed rate for a predetermined period.
Under the terms of a typical solar PPA, the customer does not own the system outright and does not have to pay any money for the installation of the system. They just have to provide the roof space and agree to purchase the electricity that the system generates.
The price for that electricity, plus any agreed rate increases over the life of the agreements, is all spelled out ahead of time.
Meanwhile, the company that owns the system will be responsible for installing it, maintaining it, repairing it if it gets damaged, and upgrading any components, such as inverters, over the life of the agreement.
Benefits of a Solar PPA
The main benefit of a solar PPA is that there is no upfront cost for the homeowner. This lowering of the barrier to entry for solar has allowed millions of people to go solar who would otherwise never have been able to.
Solar PPAs also offer homeowners predictability in their electricity costs, which makes budgeting their household expenses much easier. The homeowner knows exactly what their rate per kWh will be throughout the term of the agreement, which protects them from huge future rate increases.
Where I live in Massachusetts, electricity costs have risen 62% in the last twelve months, due to the effects of three separate rate hikes. Anyone who signed a PPA fifteen months ago would have been protected from those steep increases, even if the terms of the agreement allowed for a small rate increase for each year of the agreement.
The other way that solar PPAs offer predictability is in the area of system repairs and maintenance. These are, quite simply, not the homeowner’s problem. The system is owned, operated, and maintained by the solar company.
What’s more, since the performance of the panels is monitored 24/7 via the internet, the company will probably know about any problems before you do.
And since it’s in the company’s best interests to make sure the system is working (after all, they often don’t get paid unless the system is producing electricity), they are highly motivated to get your system fixed as quickly as possible if anything should be amiss.
The Downsides of Solar PPAs
The biggest downside of solar PPAs is that you typically won’t save as much money over time as you will with a purchased system. You will not be eligible for the various tax incentives from either the federal or your state government. You also won’t be entitled to various net metering credits that are offered by your local utility company.
Instead, the solar company gets these and passes them on to you in the form of a lower rate.
Another risk associated with PPAs is the possibility that prevailing utility rates will fall, leaving you locked into a rate that is higher than you would have otherwise been paying. Frankly, this is less likely now than it used to be.
We’re living in an era of increasing energy costs. Utility rates are trending higher, not lower. If you can negotiate a solar PPA rate that is, say 25% lower than current utility rates, there’s enough of a “cushion” there to make it extremely unlikely that your PPA rate will ever exceed your neighbors’ utility rate.
A third risk associated with solar PPAs is that you might be planning to sell your home and the new homeowner doesn’t want the panels. Removing the panels before the agreed term is up (they usually last 20-25 years) can trigger an early termination penalty that either you or the incoming homeowner is going to have to pay.
Again, this is a less likely scenario than it used to be. Most would-be homeowners are well-versed in the benefits of solar and are unlikely to insist on system removal. In fact, a recent study by Zillow found that solar panels were likely to increase a home’s value by as much as 4.1%.
How Solar PPAs Compare With Other Options
While solar PPAs are increasingly popular, they are not the only solar option available. Broadly speaking, there are two ways to go solar – either purchase a system or go with a third-party-owned program (TPO).
Within each of those two broad options, there are two sub-categories. People who purchase can either go cash or loan. People who prefer TPO can either go with a lease or a PPA.
Since the bulk of this article is about explaining solar PPAs, let’s take a moment to break down the pros and cons of each of the other three:
Cash Purchase
You will almost certainly save more money if you purchase a system with cash. As long as the system can meet all of your electricity needs, you will eliminate your power bill entirely. You will also get substantial tax incentives and net metering credits to help offset the cost.
Then, depending on how much you paid for your system and the prevailing rate of the electricity your utility is providing (the rate you no longer have to pay), you can expect the system to pay for itself in about 5-8 years.
But you need to have the money up front (most people don’t) and, if the system malfunctions or gets damaged, it’s your responsibility to get it fixed.
Solar Loan
If you don’t have the cash, you can certainly purchase the system with a solar loan. These give you the benefits of ownership – tax incentives, net metering credits and the elimination of your power bill – without the upfront cost. The trouble is, financing your solar panels comes with one huge disadvantage: Dealer Fees.
That’s a substantial additional cost that is added to the cost of the loan, rather like points on a mortgage. Except that, rather than the 2 or 3 points that are typical for a mortgage, dealer fees can add a whopping 25-35% to the cost of your loan.
More Articles You may Find Interesting
- What You Need to Know About Solar Dealer Fees
- Is it Better to Lease of Buy Solar Panels
- Check out the Best Solar Companies in Massachusetts
Leased Solar Panels
In solar, the terms PPA and lease are often used interchangeably, and it’s understandable why because they’re very similar.
Both offer a hassle-free way to go solar without any upfront cost. Both involve a long-term agreement that sets a predictable monthly cost, whereby it’s the solar company, rather than the homeowner who is responsible for repairs and maintenance.
Meanwhile, neither offers the homeowner direct tax incentives or net metering credits. Those go to the solar company in all TPO agreements.
But there is a difference between solar PPAs and solar leases. What it boils down to is that with a lease you are paying a monthly fee for the use of the equipment. With a PPA you are purchasing the energy the equipment produces.
While that may seem like a distinction without a difference, here’s why it matters. With a lease, you pay the same amount every month. If it’s a 7kW system this month (about 20 panels) it’ll still be 7kW system next month. So the cost will be the same next month, too. You’re paying by the kW.
With a PPA, you’re paying by the kWh. The more energy the system produces in a given month, the more you have to pay. Monthly PPA bills are typically higher in the summer months than they are in the winter because the system produces more power.
(In recent years, companies such as Sunrun have begun offering what’s known as a Levelized PPA, where the total annual production is divided into twelve equal monthly payments. This makes it easier for the homeowners’ from a budgeting point of view but makes the PPA look even more like a solar lease, which adds to marketplace confusion).
Questions Before Signing a Solar PPA
While the broad terms of a solar agreement are typically not negotiable (the length of the term, the early termination penalties, production guarantees, etc.), one or two key terms are. There’s usually “wiggle room” in the areas of pricing, the accelerator rate, and who covers the cost of home upgrades.
Regardless of whether they’re negotiable or not, here are some important things you need to fully understand before you sign.
- What is the per-kWh rate the solar company wants to charge me?
- How does that compare with my current utility rate
- How does that rate translate into what I will be paying for electricity each month?
- Does the solar PPA include a provision for the rate to increase year-on-year? If so, by how much?
- Is there a production guarantee? How does it work?
- Who pays for home upgrades, if they’re needed prior to installation?
- What are the costs of buying out the agreement before the end of its term.
- What happens at the end of the term?
Ask your solar rep these questions and be sure that you’re satisfied with the answers before you sign a solar power purchase agreement.
Conclusion
In conclusion, it’s important to understand that there is no “right or wrong” to go solar, only what’s right or wrong for you. If done correctly, Solar PPAs could help save money in the long run by providing clean energy at more affordable rates than traditional electricity suppliers.
With careful research into what options are available and what works best for you, Solar PPA agreements can be a good fit for homeowners who want access to renewable energy without taking on too much risk or financial burden.
