Lease or PPA

Some Background

The most straight forward method of paying for solar is with cash or a loan. Paying with cash is an immediate cash outlay which may not be immediately feasible. A loan stretches out the total payment but is still a cash outlay with the additional interest cost. This also may not be feasible.

Leases and Power Purchase Agreements (PPAs) are alternative forms of financing that are typically zero or very little down. There are many different variations of these so here the discussion will be a generic PPA.

First what is a lease? Before we get started let’s first look at a loan. With this type of financing, you or your organization owns the asset being purchased, in this case solar. You make payments in accordance with the loan terms, let’s say monthly. Once the loan is paid off you have no further obligation and remember, you own the solar. Most loans allow for early pay-off. Simply stated the loan balance is the pay-off amount. This is usually determined by the loan amortization schedule.

Back to Lease Arrangements

The leasing company buys the asset and leases it to you or your organization. You have the right-of-use of the asset in accordance with the lease terms. You make the lease payments in accordance with the lease term which is also spelled out in the lease agreement. What about paying it off before the lease term is up (early pay-off)? There is no early pay-off provision; you are obligated to pay the full amount of the lease, all the payments. At the end of the lease term the lessor retains ownership and may dispose of the asset. There may be provisions for title to pass to you, sometimes at no cost, sometimes a nominal amount.

Power Purchase Agreements (PPAs)

A PPA is a lease with solar-type provisions added in. The lease payments are in the form of buying electricity from the lessor. The payments will many times being less than you are currently paying for electricity, which is the carrot presented to help sway your decision to go with the PPA. The solar installation on your property will usually be producing much more electricity than you use. In other words the solar installation is a solar farm for the lessor which is their source of income from this installation. Many PPA agreements will call for escalating payments, increase over the term of the lease. More so with commercial installations the payment will approximate the current electricity cost and usually with escalations.

These agreements are most often 25 or 30 years long with no economically feasible provision for early termination. With such a long term, the probability of the solar aging negatively or technology dramatically changing is very high, leaving you with a huge uncertainty down the road. Additionally, you don’t own the solar so repairs and maintenance must be done by the lessor which could be a negative issue, especially as PPA term progresses.

Additionally, as the owner of the solar the lessor takes advantage of the solar tax credit and other tax benefits.

How Costly is a PAA?

The actual out of pocket cost is zero or very little, plus a possible reduction in your monthly outlay for electricity, what’s better than that, very enticing. But what you gave away for this is an asset that generates massive income for the lessor, ties up your property for 30 years and gives them all the tax benefits. For residential solar this is thousands of dollars. For commercial (nonprofit organizations, churches and HOAs), it’s easy to be over $2,000,000.

In Summary

While you have solar with no or little down and perhaps a reduce electric bill, you have an agreement that give someone else control of your property, receive income from the sale of the electricity from you and the electric company and obtain the benefits of the tax benefits. And you have no economically feasible way out of the agreement.

The above discussion is very generic. There are many variations with different lease or PPA agreement as well as varying terminology. The internet is loaded with additional information for additionally reading. But keep in mind that are very few situations where a PPA works to your advantage.

As an independent solar advisor I can help you analyze the best direction to finance the solar project.

Independent Solar Consultant and Advisor.