Solar Lease & PPA, Are they Worth It in 2023?
If you want to go solar but cannot cash out over $10,000 for average solar panels, a solar PPA or a solar lease may be the right solution for you. As the difference between these two models is almost indistinguishable, we will take a closer look at how a solar PPA is different from a solar lease. Far from the well-known ownership model, these two models have both their pros and cons when it comes to going green and saving money.
First things first, a solar system consists of several solar panels. When exposed to direct sunlight, these solar panels produce solar power, which is clean and almost free. You can use this solar energy to power appliances and lights, run your AC, and do everything you would do with power coming from the grid. In some states, you can even sell excess electricity and make some cash while doing so. However, solar panels get pricey – with an average US solar panel price being between $2.5 and $3 per Watt of DC installed. Before installing, make sure you save as much energy as you can.
What is a Solar Lease?
A solar lease is a special type of financing for your solar panels. Under a solar lease, you do not own your solar panels – rather, the leasing company does. The company purchases the solar panels for you, installs them, and then charges you a fixed monthly fee or installment. The contract term, in this case, is usually between 20-25 years. This model is similar to leasing a car.
What is a Solar PPA?
A solar PPA, on the other hand, is an entirely different system. A solar PPA or a Solar Power Purchase Agreement is a type of agreement where you do not own the solar panels. The company that purchases and installs them for you does. They use your rooftop as a surface to install the panels. In turn, you purchase the solar energy that the panels produce. This means that you pay more money for electricity in the summer than you do in the wintertime.
This is because the summertime production of solar energy is higher than in the winter. There is another kind of solar PPA, which may be useful if you want to produce more power than you need and help further mitigate climate change. Under this solar PPA mode, you only purchase the electricity that you actually use. The rest belongs to the solar PPA company to sell to other customers, such as the local utility company or a REP – Retail Power Provider.
Difference Between Solar Lease and PPA
As these two systems are so similar, it can be a bit difficult to differentiate between them. However, understanding that in a PPA contract, the PPA company deals with the electricity your solar system generates is crucial. This is because if you lease solar panels, you deal with the electricity yourself and can even get solar buyback in some states.
Furthermore, some homeowners also decide to lease solar panels, as the electricity that their solar system produces, in this case, is rewarded with RECs – Renewable Energy Certificates, which can be sold for good money. As an average residential solar panel system generates around 6 RECs per year (equivalent to 6 MW of solar energy), you could be making around $1,800 per year by simply selling these.
What is the Better Option for You?
As solar panels are pricey, some may not be able to afford them right away. Solar financing is the next best way to purchase a solar energy system, but it may not be the best for everybody, especially as you may have other loans and mortgages to pay. For this reason, solar lease or PPA is perfect for people with:
- Low Tax Liability,
- Credit Problems,
- Who Want No Downpayment,
- Variable Payment Options – this may suit some more than others, and
- The simplicity of the deal – no designing the solar system, looking for the best solar energy system, the best solar company in your area, no trying to find the best solar loan for you – the solar PPA company deals with all of this for you.
Low Tax Liability
Low tax liability may be one of the disadvantages to those looking to purchase a solar energy system. A solar energy system is subject to many tax deductions, solar incentives, and rebates. By opting for a solar lease or PPA, you miss out on a great opportunity to save a lot. However, if you have a low (federal) tax liability, you may not be able to get the 26% Federal ITC (Investment Tax Credit). However, you will also not get it with solar leases or a solar PPA. If you owe very little in taxes, keep in mind that you can roll over the tax credits for up to 10 years.
If you have a lot of credit, problematic credit history, or are burdened by other loans, student debt, or a mortgage, getting a loan for a solar system can be a problem. In this case, a solar lease or PPA is a much better solution. Solar leases and solar PPAs, in general, require a much lower credit score than a solar loan does.
Some solar owners may find it difficult to save up enough money for a downpayment for their solar energy system. In this case, solar leases and solar PPAs stand in advantage because, with them, there is rarely ever a downpayment to be made. Furthermore, as the solar system generates electricity (especially with solar leases), you can see immediate savings.
Some people may want to use variable payments that come with solar PPAs to their advantage. After all, this is the biggest difference between a solar PPA and a solar lease. In a Power Purchase Agreement, you will mostly pay only for the renewable energy you consume. However, over time, a lease or a PPA – whichever you choose, tends to even out. The best and financially most sane division is to avoid solar PPA payments and leases and go for the full solar financing where you own your solar energy system.
If you want to buy solar panels, you may be put off the idea by the complexity of the endeavor. However, as any solar provider or a solar company will tell you, going for your own solar system is the best option there is. Solar leases or a solar PPA are simple, and in just a few weeks, you can have a solar array on your rooftop. However, spending some extra time in planning and designing the system is the best that you can do in the long run, as your electric bill will be null for at least ten years after you’ve paid off your panels (in general, it takes no more than 12 years to pay off a solar loan).
Benefits of a Solar Lease or PPA
A solar lease or a PPA both have many benefits to offer to those who decide to go solar. First of all, your electricity bill will be much lower in both cases. This is because a solar lease means you pay to use panels, not their electricity. With a solar PPA, you pay for the energy used, but you get much lower prices than with a regular REP.
Furthermore, at the end of a solar lease, you get the option to pay off the solar panels at a fair market value. However, this does not mean that solar leasing is the best option there is, especially since lease payments will cover the value of solar panels already. Paying them off again makes solar lease options a bit of a stretch.
The next biggest benefit of a solar lease or PPA is the simplicity of having the solar energy system outright and not having to deal with planning, designing, and installing the solar system. In most cases, your lease or PPA company will send their own people to install the panels for you. This is why leases and solar PPA are a good option but not the best.
Furthermore, another benefit is that you do not have to deal with maintenance or think about how to sell excess electricity. On the other hand, your lease or PPA company installs the panels for you but also has all the rights to investment tax credits, solar rebates, and incentives, as well as the rights to every kilowatt-hour of excess power and RECs generated. All these represent very good income streams in addition to the clean energy that your solar panels produce. Giving up on this is not one of the major advantages of solar PPAs or solar leases.
Other Financing Options
Although there are many benefits to solar leases and solar PPA programs, there are also some benefits that other financing options can offer. Solar loans, for example, are interest-free in many states, offering you a unique opportunity to enjoy other benefits that your solar panel system has to offer. In the world of Renewable Portfolio Standard and the race to reduce carbon footprint, owning your solar panels can offer the following benefits:
- No interest rates on solar loans in some states,
- The ability to apply for Federal ITC (Investment Tax Credit),
- The ability to apply for state and city solar tax credits (usually in the form of sales tax deduction),
- Getting access to state and local solar rebates (some states and cities offer up to $1 back when purchasing a residential solar panel system),
- Getting access to solar rebates and incentives given by your local utility company, and
- Enjoying panels that pay themselves off within 12 years at most (Hawaii solar panels are usually paid off within four years due to high electricity prices).
For all these reasons, you should consider solar lease or PPA only as last-resort financing models, especially as you:
- Do not own the panels,
- Are tied by the contract for the next 20-25 years,
- Cannot opt-out as easily of the contract,
- May experience difficulties when moving and selling your house, and
- Do not enjoy the increase in property value with solar panels (with solar added value tax exemption offered in many states).
Things You Need to be Aware of
As many people opt for solar leases or solar PPAs to avoid looking for costly solar financing options, you should be aware that a lease or solar PPA usually comes with hidden costs for you. Unlike with other financing options, your monthly lease payments and PPA payments (depending on how much energy you consume) do not end up in owning the solar system. This is, for many, money thrown down the drain.
Furthermore, with a Power Purchase Agreement or a lease, you cannot choose the leasing solar panels. This means that the solar electricity will be generated with no upfront costs, but usually in cheaper panels, which have a higher degradation rate than high-quality panels you may choose with your own financing. Over time, the solar system produces less energy every year, and the homeowner pays the price difference on top of lease and PPA payments.
These “cheaper” options usually end up costing you more, especially as the solar panels are paid off within 12 years in most states, while most PPA payment plans and leases mean paying for the panels or the power they produce over the course of 20-25 years.
Additionally, you should always check the system and how well it is installed on your roof. As any solar provider or a solar company will tell you, solar panels can damage the roof if not installed properly. Avoiding down payment and waiting for a PPA company to install your panels may not be better than hiring a professional contractor in the long run.
Do you get a free roof with solar panels?
No, there are no options that would give you a free roof with your solar panels. There are, however, Tesla Solar Tiles that effectively act like roof shingles. Tesla advertises their Solar Roof as cheaper than a conventional roof and solar panels put together, but some customers say that Tesla’s calculations may not be 100% accurate. It is best to contact the company yourself and compare their solar offer with pricing in your area.
Is it worth getting a battery with solar panels?
Yes, getting a battery with solar panels is worth it. Many homeowners who decide to go off-grid purchase and install solar batteries with their solar system. This way, you can store solar energy for later use. However, this can be very costly, so it is best to find a good solar advisor in your area who can tell you more about solar financing options and alternatives, such as a solar lease or solar PPA.
How do I get out of a solar PPA?
If you are in a PPA contract term, you may want to know that a buyout or early termination of the contract is possible. However, since these are long-term contracts, ending them before a certain date may not be possible. This is so because solar companies designing, installing, maintaining, and operating solar panels are bound by the subsidies procured by the local and federal governments. However, most solar PPA companies allow you to buy out the remaining contract term from the year seven onwards.
Can you buy out of a solar lease?
Yes, you can buy out a solar lease. In general, early contract termination is not allowed in most cases. However, it is possible to do so after seven years of running your PPA contract. For most entities, it is financially viable to do so in this period, so make sure you understand your contract details and buyout options before making any moves. Beware that after the buyout, you have to take care of maintenance and any equipment malfunction by yourself.
If you want to avoid a downpayment and costly monthly payments for a solar loan, you may want to opt for a lease or a PPA agreement. Under these contracts, however, the excess power does not belong to you. Neither do the RECs nor the incentives and rebates. The final price that the homeowner pays for a typical solar PV system turns out to be thousands of dollars more than with regular financing and ownership. For this reason, you should always compare the monthly financing payment, monthly lease payment as well as PPA monthly payment. Only once you compare them all can you be sure that you can actually save money, which should be the main difference driving you to go solar.