Solar Lease vs. Solar PPA — What is the Difference?

While solar leases and solar PPAs are very similar, they have key differences worth noting ☀️ Learn how to choose between solar leases and power purchase agreements ⬆

Solar PPA vs. Lease — Overview

Investing in solar for your home is the opportunity of a lifetime. Homeowners who go solar not only add value to their house, but they end up saving more than the cost of installation in the long run. And with other advantages such as reducing your carbon footprint, having energy independence, and utilizing government tax incentives, there are so many benefits to going solar it almost seems like a no-brainer! 

However, even with all of the positives and guaranteed savings, some people just aren’t able to cover the upfront costs of installation. While the price of solar has never been cheaper, the installation itself can still be capital-intensive. Fortunately, there are alternatives to going solar other than buying your own system outright. Typically, if you aren’t able to purchase your system in cash, you can opt for either a solar PPA or a solar lease. While very similar, there are a few key differences worth considering before you decide which option is right for you. 

Solar PPA vs. lease: which is best?

Because they are so similar, people often have trouble differentiating between a solar PPA and a solar lease. To find out which is the better option for you, you must understand the pros and cons of each. Let’s cover some of the basics. 

How do solar leases and PPAs work?

In the simplest of terms, with a solar PPA, you are purchasing solar energy from someone else, while a solar lease is the equivalent of renting power from someone, where you can choose to buy off and own the power when the rental period is over. Many people mistakenly use leases and PPAs interchangeably, but there are a few fundamental differences that you must know before making a decision. 

Let us dive into the details.

So, what is a power purchase agreement?

Popularly known as a PPA, a power purchase agreement is a contractual deal between you and a developer, where the developer will cover the costs of installing a solar power system on your home or business, as well as any maintenance during the contractual period (typically 10-25 years). During this period, the developer will sell the power generated by the system back to the host customer at a fixed cost. The difference between purchasing power from a traditional utility and a PPA is that traditional utility prices are more expensive and come with unpredictable price hikes, whereas with a solar PPA, you are purchasing renewable energy at a predetermined fixed rate that is lower than that of your utility company’s. 

Solar PPAs allow homeowners to reap the benefits of solar power almost immediately since they are not responsible for any of the upfront costs associated with installation. Additionally, although you are not the technical owner of the system on your property, the PPA contract can still add value to your home in the case that you want to sell, as PPA terms can often be transferred from one homeowner to the next, benefiting all parties involved. 

A PPA program is perfect for those who are on a tight budget and can’t afford upfront installation costs. Solar PPAs adopt a pay-as-you-use model, which is attractive to many potential system owners. However, if the idea of not being able to access the full potential of your system’s production is not appealing to you, you may want to consider other options, such as leasing your solar equipment. 

A solar lease is another common solar energy contract that allows you to benefit from solar while avoiding hefty initial costs. In a solar lease, instead of being charged a fixed rate for the power you’ve used, you pay a monthly lease payment for the cost of the equipment itself, while still being able to use all of the energy the solar panel power systems produce. Solar lease terms typically last 20-25 years, so the monthly payments end up costing you less than a standard utility bill. But even with their differences, solar leases and PPAs end up costing roughly the same amount of money in the long run. 

If you choose to go for a PPA, there are a few potential negatives worth mentioning that could impact your decision. In certain situations, a broker might be the link between you and the solar energy installation company. This is important to note, as the brokerage company serves as a retailer who will often claim government incentives for themselves. This is especially likely if they have invested the money to fund commercial solar power for your business. Another con to going with a PPA is that the contract can last for a long time (some lasting up to 25 years). With that many years invested in a contract, some might argue that you are better off purchasing your own system from the start, as you can earn your money back in a fraction of the time. 

Standard terms included in solar leases and PPAs

When comparing solar leases and PPAs, you will most likely get exposed to similar contracts that carry almost the same terminologies. While you should always consult with your legal advisor for clarifications, we recommend going through the contractual agreement beforehand and familiarizing yourself with its contents.

Some of the industry-specific common terms in your contract will be:

• Definitions - This segment expounds on the meaning of terms and particular words featured throughout the contract. Most significantly, it denotes the semanticity of the words as it applies specifically to your lease or PPA.

• Terms, Conditions, and Precedent - any unique proposition regarding the duration of the lease or PPA arrangement is featured here. In addition, it often details the initial term, base term, extensions, terminations, conditions precedent, and due diligence on solar engineering studies.

• Grant and Term - this aspect determines the difference between a solar PPA and lease. In this case, a lease’s grant period is almost always shorter than a PPA financing option.

• Tax and Assessment - solar PPAs vs ownership is strongly differentiated by who gets the tax incentives/government rebates and pays any assessment fees for the system. This part of the contract specifies the tax responsibility and tax benefits.

• Insurance - This clause specifies who is responsible for protecting the system and its components.

• Maintenance - Any repairs for damaged or malfunctioning parts are detailed here. Also, it mentions the procedure for carrying out maintenance work.

• Utilities and Services - This area details the rights associated with using existing electrical systems and other connections. It also describes the type of utilities and services to use when setting up the system.

• Use on Premises and Easements - This covers the specifics on the use of your home or business for a financing contract. It can also clarify “how does a power purchase agreement work.” Easements for solar photovoltaic facilities and the tenant's permitted use help to answer this.

• Characterization of Equipment and Solar System - This talks about the qualities and features that the system will contain. It also details the type and grade of equipment for the installation.

• Damage or Destruction of Premises - Should there be any harm caused on the installation site, this clause details how the consequences will be managed. 

• Estoppel Certificate - This is part of a lease where one party owns a system, and another party leases it for some time. It fosters trust between both parties that the facts on the lease are correct and that payment terms are respected.

• Force Majeure - This part is activated if you or the financier is delayed, hindered, or prevented from executing specific actions required under the agreement. It is important to know if there are special forces beyond your control warranting the inability to perform as agreed.

Frequently asked questions

• Are there other solar financing options aside from a lease and a PPA agreement?

It is always better to buy your solar system with cash, as you can take advantage of the full potential of the system, as well as qualify for tax credits to cover the cost of installation. However, If you do not have immediate income, you can get a loan with relatively easy payment plans and low-interest rates. At best, you will spend 10 to 12 years repaying the loan, which is a better timeline for ultimately going solar.

• What if I want to pay a fixed monthly lease payment?

You can choose a lease agreement if you do not have the money to go solar right away. It is also a viable option if you aren’t eligible for any loans. It ensures that you pay the same amount of money each month regardless of how much energy you consume. This fee is always lower than traditional electricity bills, and there are no upfront fees that you need to pay.

• Which are the best and most durable solar batteries for the home?

Some of the best battery brands include - Sungrow SBP4K8 (if you are seeking a small battery with storage capacity up to 5kWh), LG Chem RESU10 (if you want a mid-size battery that can store up to 10kWh), BYD Premium (if you’re going choose to enlist a modular battery system for your solar energy), Tesla Powerwall 2 - (if you need an AC coupled battery system), and Powerplus Energy (if you’re opting for a complete off-grid solar battery system in your home or business).

• What is Net metering?

Net metering is an incentive awarded to solar owners who generate excess energy, allowing them to sell their power back to the grid.

Essentially, during sunny days when the panels produce energy that exceeds your household’s or business’s consumption, the excess energy is sent back to the grid. You can then pull this electricity back on days when it cannot produce adequate energy. You can also use the excess energy to offset bills and get a paycheck.

Regardless of whether you decide to go with a solar lease or a PPA, there should be no doubt in your mind that the decision you make will lead to many years of savings on your utility bill. Ease your wallet and your mind, and talk to one of our solar experts today to find out how you can go solar. 

Why Invest in Solar?

Are solar panels a good investment?

The simple answer: absolutely!

Well, when you consider the savings you will make on traditional energy options, the carbon-free energy production process, and saying goodbye to other unreliable sources of energy, solar power systems for your home are an incredible investment that will benefit you and the environment!

Utility bills are one of the highest monthly expenses in any home or business, and until the introduction of solar systems, they were practically unavoidable. With solar, you are able to reduce or completely eliminate the dreaded electric bill, and avoid the financial strain of constantly rising energy costs.

Along with conventional electricity usage, comes untimely and inconvenient power outages. Whether you are running a business or cooking dinner at home, a power outage of any kind can dramatically interrupt your day, and end up costing you money. But if you choose to go solar and invest in a battery backup system (such as the Tesla Powerwall), you can say goodbye to being shut off and stuck in the dark. The Tesla Powerwall can detect an outage, disconnect from the grid, and automatically restore power to your home in a fraction of a second.

Unfortunately, receiving hefty electric bills and incurring losses due to unprecedented power failures has been normalized, despite there being a sensible and affordable solution: solar. This is partly due to the fact that many people are turned off from going solar because of its seemingly high upfront cost. However, with current federal tax incentives and plenty of financing options, the financial barrier to go solar is much smaller than it may seem - but the savings are endless.

Let us highlight the various reasons why solar energy is a great investment. 

• Reduce or Eliminate Your Utility Bill

Solar energy is considered a long-term investment because it has a typical payback period of 3-5 years. However, it is important to note that the moment your installation is complete, you will see immediate savings on your utility bill. 

According to the US Energy Information Administration, a residential home in the US uses roughly $115.49 worth of electricity every month. Investing in solar panels is a great and viable option when looking for ways to cut down on utility bills. Among other things, the energy you harvest from your solar panels can be used for powering appliances, heating and cooling, and lighting, thereby freeing you from dependence on conventional electricity and the ever-growing expenses that come with it.

To put this in context, let us consider this cost-benefit analysis:

Imagine that you pay a monthly bill of $100 to your utility company, where utility rates have continuously increased by 3-3.5% per year. But then, you read a wonderful article from a local solar company about how much you can save by going solar, and you decide to see for yourself how great of an investment it actually is. Now, you have your own solar system that will completely pay for itself in just 3-5 years, and you are already enjoying free electricity that will continue for at least another 25 years! And because your solar panels have a warranty of 25 years and a life cycle of 30+, you are projected to save at least 3X of your original investment amount.

While installing solar panels for your home is a great way to save money and go green, utilizing solar energy for your business can cut costs and increase your profit margins. In an environment where the bottom line is one of the most important metrics, why wouldn’t you invest in something that has the potential to improve it year after year?

Most companies, especially those in the manufacturing industry, use a lot of electricity. By choosing to harness the sun's energy, they will bring down power costs, positively affecting their bottom line. As such, the company will see a return on investment in the long run.

• Increase Your Home’s Value

There is no doubt that going solar will save you money on your electric bill, but one factor of going solar that is often overlooked is the value that solar panels will add to your home. Additionally, homes with solar often sell faster than those without. The idea of living in an energy-efficient home and eliminating problems that arise as a result of unprecedented power failure will attract potential homeowners. By investing in a solar system, you gain a competitive advantage against other home sellers, even at a higher asking price. Opting for a solar power investment improves your quality of life and adds value to your home, all while paying for itself after a few short years

• Take Advantage of Government Incentives

Did you know that a solar (PV) owner is entitled to certain tax exemptions?

The federal solar investment tax credit (ITC) is a tax reduction for households and businesses that go solar. Basically, the owners can claim 26% of the total cost of the system back on their taxes. This is particularly appealing to people who sought the help of financial institutions to install the panels, as they get to clear their loans earlier than expected. However, the ITC won’t be around forever. As of December 2020, the credit is set to reduce to 22% at the end of 2022, and completely disappear by 2024. The ITC is just another reason why there is no better time than now to go solar. 

And if free money wasn’t enticing enough, solar systems also come with net metering advantages. If you tap excess solar energy, you can sell it to energy providers and earn extra money that you can use to clear any outstanding power bills.

Bottomline

Solar systems are a worthwhile investment, and their long-term cost-effectiveness is undeniable. If the seemingly high initial costs are a point of concern, between the ITC and various financing options, solar is more affordable now that it ever has been. If you want to take the next step towards a more affordable and sustainable future, contact one of our solar experts for a free consultation today!