Solar Power Purchase Agreements Explained: The Pros and Cons

The cost of solar panels has decreased over the years, but this technology is still pricey and unattainable for many. 

Powering your home with solar energy is likely to save you a lot of money over the long run, but to get there, you'll have to invest somewhere between $10,000 and $30,000 (upfront or through monthly financing). One way around this large financial hurdle is through a solar power purchase agreement.

A PPA is an agreement between a property owner and a solar installer, often in cooperation with a utility. Essentially, the solar company retains ownership of the system it installs on your property but agrees to sell you the energy it produces at a rate that is considerably below what you would otherwise pay your utility. 

When financing becomes more expensive, as it has recently, PPAs tend to become a pretty attractive option. 

"Right now in the market, PPAs make more sense financially, depending on the PPA," said Garrett Mendelsohn, CEO of Solar Bootcamp, which operates a training program for salespeople getting into the solar industry.

Sounds like a good deal, right? It certainly can be, but PPAs come with some drawbacks and a large hurdle: They're not available in every state. The number of states that allow PPAs is a moving target, but right now they're allowed in at least parts of 31 states. If you live in one of those states where PPAs are offered, this financing plan might be a good option to start soaking up the sun's energy and saving on your electricity bills.

What is a solar power purchase agreement?

When you purchase a solar power system, you pay a solar installation company for the materials (photovoltaic cells, racks, inverters and other parts) and the installation on your roof that's needed to collect energy from the sun. You will own the system that is now part of your home.

Considering Solar Panels?

Our email course will walk you through how to go solar

 

Under a PPA, the installer will retain ownership of the solar system, and then charge you a fixed rate for the electricity it produces. The PPA provider will bill you every month for the energy you use, much like your electricity utility does. There may be occasions where you have to pay both the PPA provider and your energy utility, but your overall energy costs should be much lower -- average PPA costs per kilowatt are about a third of that of traditional energy.

One thing to look for in a PPA contract: Many include so-called "escalators," which raise the rate you pay for electricity at certain intervals within the contract.

Considering Solar Panels?

Our email course will walk you through how to go solar

 

How do solar PPAs work?

"PPAs provide a long-term contract between a property owner and energy developer that installs, owns and maintains a solar array on a property owner's land," said Kelly Stevens, assistant professor at the School of Public Administration at the University of Central Florida. 

"The energy developer sells the electricity generated by the solar array back to the property owner, thus setting a long-term, fixed-rate for electricity and financing the up-front costs to install a solar array. In exchange, the energy developer qualifies for the Investment Tax Credit (ITC), lowering their overall capital costs to install the photovoltaic system."

Can you save with solar PPAs?

"Absolutely," said Ben Delman, communications director at Solar United Neighbors. "PPAs are designed to save you money, ideally as soon as the PPA is signed and the system goes online."

Because energy rates through PPAs are about a third of traditional energy rates, you can expect to realize immediate savings with a PPA. Be cognizant of any escalators in the PPA contract to make sure you're getting a good deal.

Mendelsohn, of Solar Bootcamp, points out that in recent months, high interest rates have also pushed up dealer fees, which may be added to an installation bill or rolled into the overall price tag. Because there are no dealer fees involved with PPAs, it's another way to save versus paying for (or financing) a solar installation up front. 

Some PPAs also come with the option to purchase the solar system after a certain period, making it more like a lease-to-own situation. This is another way to avoid dealer fees, and some arrangements may also come with extra insurance or warranty coverage.

The pros and cons of solar PPAs

Pros

• No upfront costs: A PPA is one of the most affordable options for going solar. After you agree to a provider's price and terms and sign the contract, it will install the system on your home and you can start to realize savings on your energy bill.

• Less responsibility: Since you've contracted with a PPA provider, all of the responsibility for the system's maintenance and tax implications is their responsibility, not yours.

• It's cleaner energy: Many energy utilities across the country generate their electricity through sources such as natural gas or coal. Getting clean energy through a PPA cuts down on your contribution to climate change.

Cons 

• PPAs may not make sense for you: Even if you live in a state that allows PPAs, you may not save much money on your energy bills due to how much sunlight you get on your property or more aggressive price escalators. Buying a system outright may provide a better return on investment over the long run.

• You won't own the solar system: Under a PPA, you are strictly paying a provider for the energy you use. Therefore, you won't get the ancillary benefits of owning a solar system, such as the ability to get tax rebates or sell renewable energy credits to your utility.

• It can complicate selling your home: Owning a solar system has been found to boost the value of the home, which may not be the case with a PPA. Transferring a PPA to a new owner may be possible, but it could be complicated.

• Long-term agreements: If you don't read the fine print, you may find yourself with early termination fees if you break the agreement early. 

Getting a solar power purchase agreement has its advantages for the average homeowner who wants to go green but might not be able to foot the bill for the up-front expenses or simply doesn't have the bandwidth to make the shift on their own. 

The primary benefit of this arrangement is getting cheaper and cleaner energy without the hassle and cost of a traditional setup. Because the developer is in charge of the actual installation, all the homeowner has to do once reaching the agreement is allow the system to be installed and start paying for the electric bill once it's ready to go. You'll typically notice a steep decrease in your monthly energy bill because you're getting your electricity from those solar panels and paying a fixed price that you and the developer agreed upon.

On top of that initial installation process, maintenance and long-term upkeep also fall under the purview of the developer. If your panels need replacing or fixing, the developer is tasked with making that happen. That takes a significant amount of financial risk off your hands. Again, all you will pay for is the monthly electricity bill.

There are trade-offs when you decide to enter a solar power purchase agreement. For one, you don't own the solar panel system, so you do have less control over it. While you don't have to go through the process of picking the panels or fixing them if they suffer any setbacks, you also won't have as much say over the system that powers your home and won't be fully energy independent, as you're still relying on the developer as your provider. You also won't get the benefit of tax incentives for making the switch to clean energy since you don't own the system. The developer gets the tax benefits and can sell excess energy generated by the system for a profit, which you won't be able to benefit from.

You'll also have to keep an eye on your property taxes with a solar system. It will increase the value of your property, which can result in higher property taxes that you will have to pay annually. Some states will exempt you from this type of increase for a green upgrade. 

To see which states offer property tax exemptions, click here. See at CNET

One last thing to take into account is the length of your agreement with the developer. Solar power purchase agreements aren't short-term deals. You'll be locked in for 10 to 25 years or longer. If you need to get out of the agreement before then, you may face early termination fees, so make sure to read the fine print first.

Leasing vs. buying vs. solar PPA

The most straightforward way of getting a solar system on your property is to simply purchase it, either with or without the assistance of financing. PPAs and leasing are two other options that are similar in practice. 

Leasing a solar system is different terminology that Mendelsohn says might affect how or if the agreement is reflected on your credit report, among other variations.

"There's a few different variables, but they're almost identical."

In practice, the key difference is usually that a lease involves a fixed payment per month, whereas what you pay under a PPA is tied to a fixed rate and therefore your energy bill is still tied to the amount you consume. With both leases and PPAs, you might pay a bill to the solar company and to your utility, or you might pay one consolidated bill.  Here's a comparison of three solar scenarios.

Where are solar PPAs allowed?

There is a whole mish-mash of state and local legislation governing where PPAs are permitted and to what extent. The rules and regulations in these different jurisdictions can be quite nuanced. Your best bet is to contact local installers or solar advocacy nonprofits operating in your state for the most up-to-date information on options in your area. 

As of September 2023, it was possible to enter into some sort of power purchase agreement in at least some jurisdictions within these states, territories and districts.

Factors to consider before agreeing to a solar PPA

A little-discussed aspect of the current federal solar tax credit is that it is nonrefundable and only counts against your income tax liability. This means that if you typically find yourself owing minimal or no personal income taxes, you may not see the full benefit of these tax credits. You can roll the credit over to claim it in later years when you have a larger tax liability, but if you regularly owe little or no income tax, you may never fully benefit. Consult a tax professional here to determine your specific situation. 

This is just one reason that a solar PPA might be a more attractive option for you. Some other things to consider when looking into a PPA as a potential solar option:

• Is the upfront cost of a new installation a barrier to going solar?
• Are you interested in lowering energy bills or greening up your energy consumption, but want nothing to do with the responsibility of owning and maintaining a solar system?
• Does your credit score make a PPA more attractive?
  

Answering yes to any of the above probably warrants a closer look at PPAs. But also consider these questions:

• Are you looking to sell your home in the next few years?
• Do you want control over the look and operation of your solar system?
• Do you want to take full advantage of tax credits, incentives and the boost to your home value that come with a solar installation?

Answering a solid yes to any of these questions suggests you should also be looking into purchase and financing options for a solar system. 

Is a solar power purchase agreement right for you?

For many people, a solar power purchase agreement is a solid deal. A PPA is a good way for homeowners without the financial means to outright purchase a solar system to still enjoy savings on their monthly energy bill. It saves on the steep upfront costs and time-consuming nature of installing solar panels while providing a quick and affordable path to going green.

However, for those looking to maximize their solar energy by capitalizing on tax incentives, energy credits and other benefits, purchasing a solar system outright is a better option. If you can make financing a solar system work, experts say the investment will pay for itself after about six to 12 years, while boosting the value of your home.

Essentially, if you can afford to invest directly in a solar system, it's worth it. If the only way for you to go solar is through a PPA, you'll still get solar power's key benefit: immediate savings on your energy bills.

To see which solar installers offer PPAs, see CNET's Best Solar Companies See at CNET

Solar PPA FAQs