The Homeowner’s Guide To Solar PPAs
5 - Minute Read
PUBLISHED: Dec 30, 2022
It’s hard for homeowners interested in renewable energy to overlook online advertisements for solar PPAs (power purchase agreements). While they use terms like “free solar” or “no-cost solar,” these ads often refer to solar PPAs or solar leases rather than owned solar installations.
PPAs are a legitimate way to get solar panels on your home. But how do they compare to owning or leasing a home photovoltaic (PV) system?
Let’s examine what you should know about solar power purchase agreements before signing on the dotted line.
What Is A Solar PPA?
A PPA is a third-party arrangement in which a solar company installs a solar system on a homeowner’s roof. The solar company owns, operates and maintains the system while providing electricity to the homeowner at agreed-upon per-kilowatt-hour (kWh) rates. This rate is often competitive with the local utility rate.
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How A Solar PPA Works
During the PPA contract period, which can be 5 – 25 years, the homeowner (sometimes called a host customer) purchases power from the solar installer at the agreed-upon rate. The contract may call for the price to rise over time through what’s known as a price escalator. You’ll pay the solar developer monthly for the energy the system produces.
Utility companies that offer net metering will credit the host customer for excess electricity their system supplies back to the grid. If you require more electricity than your system produces, your home will use energy from the utility grid. You will likely still get an electric bill from the utility company even if you don’t use grid energy to cover connection and discharge costs.
The developer is responsible for maintenance and system monitoring. However, homeowners may be responsible for site maintenance such as trimming trees near the panels to prevent shading.
Solar PPA Vs. Lease
A solar lease is another third-party solar agreement. Typically, the homeowner pays the solar developer a monthly fee for a term lasting 15 – 20 years, according to the National Renewable Energy Laboratory. Unlike a PPA, this fee is usually not based on usage. Like solar PPAs, the price may escalate over time, so it’s not truly a fixed rate.
Responsibility for maintenance can vary, so it’s wise to confirm the terms before leasing solar panels.
Solar PPA Vs. Purchase
Purchasing and owning your own solar installation comes with many benefits over a PPA or lease. Even though you have to pay for the panels and installation upfront, you won’t have to purchase the solar energy back from a PPA company. And if you use a solar loan, you can have fixed monthly payments instead of the slowly increasing costs of a PPA. Be sure to compare the savings from incentives and net metering long term versus what you’ll spend on rates through a PPA.
If the homeowner lives in an area with a market for Solar Renewable Energy Credits (SRECs, pronounced Ess-rex), the homeowner should verify whether they or the developer could sell them.
While a PPA is an inexpensive way to reduce your carbon footprint and potentially lower your electricity bills, purchasing solar panels outright might create more savings in the long run.
What Happens When A PPA Expires?
When the PPA term expires, the homeowner can renew the deal, have the solar panel system removed or purchase the system at fair market value. Whether buying the system makes sense could depend on the length of the contract, which can impact the performance of the system.
Savvy homeowners will evaluate the numbers before signing a PPA. They may weigh whether buying the system will save them more money in the long run versus paying nothing upfront with a PPA.
In A PPA, The Solar Developer Gets The Incentives
Rebates and tax incentives from government agencies and utility companies often make it more affordable for homeowners to buy a solar array. In Illinois, for example, some homeowners can use incentives to reduce costs by half.
In a PPA, the homeowner doesn’t own the solar project. That means the solar company gets the incentives, which include potential ongoing financial benefits like SRECs.
Other Financing Options For Solar Panels
The previously mentioned solar lease is another way to go solar with low upfront costs.
It’s also possible to use a solar financing loan, which works like many other loans: A homeowner makes a monthly payment toward their purchase.
This allows homeowners to receive all the benefits from incentives while potentially lowering their energy cost as they use clean energy. Because solar components typically have long warranties, maintenance costs may not be an issue.
Homeowners should still weigh the cost of monthly loan payments versus the potential utility bill savings over time.
When Does A Solar PPA Make Sense?
If you don’t have the cash to buy a solar energy system, or you don’t qualify for a solar loan and aren’t eligible for the federal solar tax credit (sometimes called the federal investment tax credit), a PPA might be a good option. The terms might protect you from sudden spikes in electricity costs while also allowing you to reduce your carbon footprint.
Solar PPA Pros And Cons
Let’s review a few quick pros and cons of solar PPAs.
Low-cost way to go green
Incentives likely going to the solar developer
More predictable electricity bills
May cost more in the long run than buying a system outright
No maintenance or monitoring responsibilities for homeowner
Could potentially complicate the situation when selling your home
Still allow the host customer to take advantage of net metering
Homeowner possibly responsible for preventing trees and other obstacles from shading the solar array
FAQs: PPAs For Solar Projects
Are PPAs popular with homeowners?
According to the Solar Energy Industries Association® (SEIA), interest in third-party solar arrangements is declining. In California, for example, third-party agreements dropped from 72% of residential installations in 2013 to 32% in 2017. Trends are similar nationwide.
Will I have to pay higher property taxes if I sign a solar PPA?
Solar panels can increase a home’s value, so it’s possible that adding a PV array through a PPA could increase your property taxes. Some states have laws that exempt increasing value attributed to solar panels, though, so always check your state’s laws. The Database of State Incentives for Renewables & Efficiency® is a helpful resource.
What if I want to end the PPA early?
It’s often possible to end a PPA early. But like with many binding legal agreements, premature termination might cost you. Be sure to closely review the contract so you understand fees associated with an early termination.
What if I sell my home before the PPA expires?A PPA can complicate the process of selling your home. To avoid this, consider paying off the remainder of the term or trying to convince the home buyer to assume responsibility for the PPA. Also discuss with your PPA provider and real estate agent to determine the best course of action.
The Bottom Line: Solar PPAs Can Work, But Ownership Might Work Better Long Term
A PPA can be appealing because it offers potentially lower energy bills, a somewhat fixed price per kWh and no money down.
But the declines in third-party ownership show that interest in PPAs may be dropping. Meanwhile, home solar system prices are down 50% in the last decade and federal incentives are locked in through 2034. This could indicate that owning a system is the better long-term option.
Looking for an affordable way to own solar panels? We can help. Talk to a Solar Advisor to see how much you could save.