Power purchase agreements: What you need to know

Many $0-down financing options are available for going solar, including ownership (i.e., solar loan) or third-party-owned (i.e., leases) solutions. Many homeowners looking for an easy, low-cost, maintenance-free way to install a solar panel system move forward with a power purchase agreement (PPA). In this article, we'll discuss solar PPAs and their advantages and disadvantages as a financing solution.

Financing a solar panel system with a power purchase agreement, or a PPA, is similar to leasing or "renting" a solar panel system. Simply put, a solar company or PPA financier covers all the costs of buying solar equipment and installing it on your roof. Though the solar panel system is on your property, they own it and therefore take care of any necessary maintenance.

The solar panels generate electricity and power your home, allowing you to save on your monthly utility bills. In exchange, you agree to pay the system owner (i.e., the PPA financier or solar company) a set rate for each kilowatt-hour (kWh) the solar panel system generates. In other words, you agree to purchase the power of the solar panels, hence the name PPA. This rate is typically lower than what your utility company charges for the electricity you'd otherwise use from the grid.

Unlike solar leases, PPA charges vary from month to month since your bill is based on the solar panel system's production. Because solar panels typically produce more electricity during the summer than during the winter, most people experience higher PPA payments during the summer months and more savings on utility bills.

The majority of residential solar PPAs are $ 0 down. Some companies offer pre-paid PPA options if you're interested in paying the entirety of the PPA upfront, but this is less common.

As with all financing solutions, going solar with a PPA has both advantages and disadvantages. Here are some of the pros:

$0-down

Most solar PPAs offer a $0-down way to go solar: you won't start paying until the solar panel system starts generating electricity for your home. Because of this, PPAs are a popular option for homeowners who don't want to invest money upfront. However, don't choose a PPA, assuming it's the only way to go solar with no money down – financiers offer loans and lease agreements with the same attractive benefit.

No maintenance

With a solar PPA, you won't own the equipment on your roof. This means that, should your solar panel system require maintenance or servicing, the PPA financier is responsible for taking care of and paying for any required maintenance and labor. On the other hand, if you own your system, you typically need to handle any necessary maintenance. Remember that rooftop solar panel systems are stationary and require very little maintenance. Plus, if you own your system, you'll have multiple warranties to protect you!

Electricity bill savings

Though not to the same extent as solar ownership options, you can still save money with a solar PPA. Most PPAs offer roughly 10-20 percent off your electricity bill costs. For the average home that spends $118 on electricity bills each month, this means $141 to $283 in savings during year one – that'll add up to over 20+ years of a PPA agreement!

And now, for the downsides of PPAs. Here are some cons to consider as you're deciding between solar PPAs and other financing options:

Lack of solar incentives

With a PPA, you won't own your solar panel system. This means that solar incentives you'd be eligible for with a solar loan option (like the federal investment tax credit (ITC), solar renewable energy certificates, and any local rebates) go straight to the solar company/financier that made the upfront investment in the system. Importantly, this may not be a downside for everyone, and even people with solar panel systems can't always take advantage of every type of incentive. For example, take the solar ITC:  you can't benefit from tax credits like the ITC if you don't owe taxes in the first place. This is sometimes the case with retirees – it's always a good idea to check with a tax advisor to see if you can benefit!

No added property value

Studies have shown that solar panel systems can increase the value of your home by 3-4 percent. However, this is only true if you own your system: solar leases and PPAs do not impact property value. In fact, in some cases, a PPA may make it harder to sell your home – typically, if you sell your home before your PPA contract ends, the new owners of your home need to take over the PPA contract. If they refuse, you may need to buy out the remainder of the lease and have the solar panel system removed from your roof.

Annual escalators

Some PPA agreements include an annual escalator, though many we've seen in 2020 no longer do. If you sign a PPA contract with an annual escalator, you will pay a higher rate for solar electricity each year.

PPA companies include these rate escalators under the assumption that your electric utility company's rates will continue to rise and increase at a higher rate than what they stipulate, meaning you'll still save money. If your PPA escalator happens to raise your rate higher than utility rates rise throughout your agreement, you might end up paying more for the solar panel system's electricity than your utility company offers. Before signing a PPA contract with an escalator, read the contract thoroughly to understand if any protections are in place should this happen, and shop around for fixed-rate PPA options!

Less predictable monthly charges

Given seasonal weather patterns, solar production modeling, and knowledge of your electricity consumption habits, solar companies can come up with a pretty good estimate of your monthly PPA payment. However, just like you can't always predict the weather, no one can predict exactly how much a solar panel system will generate over the month. As such, these variable PPA payments are often more difficult to budget for than fixed monthly payments associated with solar lease and loan agreements.

When it comes down to it, whether or not a PPA is the right financing option for you depends on personal preferences and financial goals. If you want to save as much money as possible when you go solar, ownership is the way to go – you typically save more money over time if you finance with a solar loan than a PPA because you're eligible for federal and state solar incentives, and you generate more cash flow once you pay off the loan. However, if you can't take advantage of tax incentives and don't want (or can't) take out a loan, solar PPAs can be an easy way to get panels up on your roof.

You wouldn't buy a car without considering a few offers first – solar is no different. On the EnergySage Marketplace, you can compare up to seven custom quotes from local installers. If you're interested in loans, leases, or PPAs–or want to compare all three–note it in your account so that installers can provide some financing options to consider. If you'd like to start with a quick estimate of what you can save with solar, try our Solar Calculator.