What is a solar purchase power agreement?
A solar power purchase agreement (PPA) is when a developer pays to install a solar energy system on a homeowner’s property and sells the solar energy to the homeowner at a fixed rate. The process of getting solar panels on your property is quite a task. You’re responsible for selecting the equipment, finding a builder, and organizing any associated tax documentation in order to get the federal tax incentives. It can all be a little overwhelming. But there might be a better, easier way.
A solar power purchase agreement, also referred to as an SPPA or a PPA, is an alternative path to get solar energy for your home. You still get to use clean solar energy without having the headache of setting up the solar system all on your own.
PPAs let you pass the heavy lifting to a developer while still enjoying many of the benefits that go along with solar, such as less expensive green electricity rates and using a renewable resource to offset pollution. All the details, from installation, permitting, design, and even handling filing taxes to receive federal and state incentives, are operated by a partner that you hire.
Think of it like this: Imagine you have a car you can drive anywhere you want, but you never have to fill it with gas, wash it, or take it for oil changes. You get to hop in and go for a spin whenever you want. That’s essentially what a financial PPA can do for you, except the car is the solar energy system at your home. Put another way, you pay for actual usage with a PPA, but with a lease you have consistent monthly payments.
Read more about the pros and cons of this type of arrangement in detail so you can make an informed decision about solar PPAs.
Solar PPA visualized
Benefits of a solar Power Purchase Agreement (PPA)
A solar PPA has many benefits, but it’s not for everyone. For example, if you desire a tax deduction for your solar energy system, then a PPA is not the path you should take. However, if you want to use green energy and become energy-independent without many upfront costs, a solar PPA might be the perfect solution. Let’s take a closer look at the benefits of a PPA.
The top two benefits of a financial PPA are that the homeowner or renter does not have to pay for a solar panel system and does not have to concern themselves with cumbersome planning details. So, if you choose to go this route, you can gain the value of a solar energy system without eating up all your free time or monetary resources.
Plus, if construction is delayed or solar panel maintenance needs to be done later, it’s the developer’s job to resolve any issues. This arrangement curtails a large amount of financial risk that would otherwise fall on the homeowner.
Get cheaper energy bills with a PPA
Another benefit of a PPA is the reduced energy costs. The developer sells the solar electricity to the homeowner at a reduced cost. This price may stay the same throughout the PPA term, or it may have an escalator clause. The escalator increases the price incrementally over time to take into account rising utility costs.
So, not only do you not have to worry about the particulars of building and maintaining the solar energy system on your property, but you also save on your monthly energy bill and are less reliant on the electricity grid. Plus, you get the good feeling that goes along with using green energy.
Ok, so if it’s starting to sound like a solar PPA might be a good option for you, let’s investigate further to see what other factors might come into play. Remember, with a PPA the developer owns the byproducts of the system, whether for better or worse, so additional solar financial benefits will go to the developer, not you.
For example, the developer can claim the federal investment tax credit (ITC). Plus, profits from selling solar renewable energy credits (SRECs) to the local utility will also go to the developer.
SERCs allow the utility to claim a certain percentage of renewable energy, which has a threshold requirement in some states. Check to see the rate that SRECs are selling for in your state, as prices can vary by hundreds of dollars depending on location. For example, Texas does not explicitly have an SREC market but does allow trading of Renewable Energy Credits (RECs).
Other PPA costs
- Upgrades to your property: While you don’t have to pay to build the solar system, a PPA may still require you to make certain upgrades to your property. Costs from site upgrades, such as trimming trees that block sunlight, can fall on the homeowner.
- Property taxes: Having a solar energy system on your property is a commodity, so it can raise the value of your home, which in turn can increase your property taxes.
- Financing: PPAs don’t require financing since the developer takes care of the bulk of the costs, and no down payments are needed.
PPA contracts and early termination fees
Keep in mind that a PPA is a legally binding financial commitment that can last anywhere from 10 to 25 years. Like with any agreement, make sure to carefully review your contract with your solar development partner. And getting a second opinion is never a bad idea.
Be clear on terms and conditions, especially costs, length of the contract, and early termination fees (ETFs). Most power purchase agreements will have an option to end the contract early, but it can be pricey, so make sure to review earth termination costs ahead of time.
You also want to consider, “what happens with my solar system once my PPA term expires?” You can:
- have the solar energy system removed.
- renew the solar power purchase agreement for another term.
- purchase the system from the developer.
If you move before the PPA is up, you can also explore possibilities to transfer the agreement to the new homeowner or move the system to your new residence. Both of these options are more complicated and could incur more costs.
Pros and cons of a solar PPA
|Less financial risk||Not qualified for tax incentives|
|Little to no upfront money needed||Obligated into a long-term contract|
|No need to take out a loan||Cannot earn income from SRECs|
|Reduce monthly energy bill||Fees may increase over time|
|Less time commitment for planning and design||May still need to pay for site upgrades|
|Increase home value||May have a higher property tax|
|Gain energy independence||May be responsible for early termination fees|
Solar PPA vs. Solar lease
It should be pointed out that the main decision for a homeowner or renter when it comes to deciding how to pay for their solar system is primarily between owning or not. Owning will typically give you the best financial incentives, such as the federal solar tax credit.
Of course, owning is not an option for everyone. So, for those consumers, the solar industry has other options for those who still want the benefit of solar energy. Broadly, the other two options can be broken down into either leasing or getting a power purchase agreement.
However, within both of these buckets, there are various ways that costs are broken down. For example, there may be third-party fees, down-payments, monthly payments, lease-to-own, and net-metering advantages. Long story short, read all the details of any agreement and make sure that you understand all costs and benefits of your solar plan before signing on the dotted line.
Think of it this way, leasing or using a PPA brings another party into the mix. To compare this to a situation most of us have been in, let’s say you were to purchase a car. Consider these four scenarios:
- You pay for it outright, and then you pay to purchase your gas and any future maintenance costs. That’s like owning your solar system.
- But you could also buy your car, but you get a loan and pay it back in installments. That’s similar to financing your system.
- Or perhaps you pay monthly payments for your car, with the understanding that you will return it after a few years to upgrade to a newer model. That’s like leasing your solar system.
- Finally, maybe someone buys the car for you, but you can use it whenever you want as long as you pay for the gas during the time you drive it. That’s most similar to a financial PPA.
Solar Power Purchase Agreement FAQs
What is a PPA?
A PPA, or power purchase agreement, is a type of plan in which one party is in charge of all aspects of a solar energy system, including building, designing, maintenance, and tax incentives. The other party, typically the homeowner or renter, purchases their solar energy from them at a reduced cost.
Why does the house still need to be connected to the power grid?
A home solar energy system still needs to be connected to the power grid to get power in times of low solar energy production. Batteries can help retain solar energy for off-peak times.
Can you net-meter with a PPA?
Yes. If net-metering is available in your state, you are able to take advantage of this benefit, whether you own, lease, or have a solar PPA.
Is it better to own, lease or have a PPA?
The best option for setting up a solar system at your home is the one that meets your individual needs. If you prefer to collect tax incentives and don’t mind a down payment, owning is the way to go. If you prefer to get started with solar with little upfront costs, leasing or a PPA might be best.
What’s the difference between a financial PPA and leasing my solar system?
When you lease your solar panels, you pay a monthly fee to lease the system. With a PPA, you are paying per kilowatt-hour for the energy you use. The other main difference is that in a PPA, the developer retains the SRECs; however in a lease agreement, you may be able to negotiate to keep the SRECs (and the profit from them) in your control.
Is solar energy right for me?
Green, renewable solar energy benefits both the world and your wallet. Find out what other incentives might be available in our state guide to solar panel costs for California, Florida, North Carolina, Texas, or Virginia.