Have you been exploring solar energy options and are now considering whether a Solar PPA (Power Purchase Agreement) is the right fit for you? Or maybe it even sounds as though it is a scam. When people get to this stage in their solar journey, they often ask questions like, “What are the drawbacks of a solar PPA?” or “Is a PPA a bad idea?” They might search for terms like “Disadvantages of a Solar PPA” or “Cons of a Solar Power Purchase Agreement” to find detailed answers.
Unfortunately, many articles you find online might be designed to capture leads rather than offer a comprehensive view. These articles might present solar PPAs as either a perfect solution or a complete mistake without giving you the full picture.
In this article, I’m here to provide a deeper understanding of the disadvantages and potential issues of a solar PPA. I aim to address the most common concerns and misconceptions, offering a balanced perspective that can help you make an informed decision.
What You’ll Learn:
- What is a Solar PPA
- The Drawbacks of a Solar PPA
- Common Misconceptions About Solar PPAs
- Comparing a Solar PPA to Traditional Power
- Who a Solar PPA May Not Be Good For
- Why a Solar PPA Might Still Be a Good Option for Some Homeowners
What Is a Solar PPA?
To start, let’s define what a solar PPA is. A Solar Power Purchase Agreement (PPA) is a financial arrangement where a solar provider installs a solar system on your property at no upfront cost. In return, you agree to buy the electricity generated by the system at a set rate, which is typically lower than your current utility rate. In a solar PPA agreement, the electricity is 100% yours.
How Do Solar PPA’s Work?
A solar Power Purchase Agreement (PPA) involves a solar provider installing a solar energy system on your property at no upfront cost. You agree to purchase the electricity generated by the system at a predetermined rate, typically lower than your utility rate. The provider maintains ownership of the system and claims any available tax incentives, while you benefit from reduced electricity costs and maintenance-free solar energy.
Steps to Consider When Evaluating a Solar PPA
Step 1: Availability Check
The first step in considering a solar Power Purchase Agreement (PPA) is to ensure that it’s available in your area. Currently, PPAs are only offered in certain states. These states include:
- Arizona
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Georgia
- Illinois
- Maryland
- Massachusetts
- Nevada
- New Jersey
- New York
- North Carolina
- Ohio
- Oregon
- Pennsylvania
- Texas
- Virginia
Step 2: Analyzing Your Electric Bill
If a PPA is available in your state, the next step is for a solar consultant to analyze your electric bill. They will look at your total delivery and supply charges to see if the solar PPA rate is lower than what your utility company currently charges. The goal is to secure a rate that is lower than your utility’s rates, providing you with immediate savings.
Step 3: Understanding the Annual Escalator
One important aspect to consider is the annual escalator rate in your PPA. The industry standard for PPA escalators is around 2.9% per year. This rate should ideally be lower than the annual increase rate of your utility company. Most utility companies increase their electric prices at a higher rate than 2.9% per year, so a solar PPA will still save you money over time.
Step 4: Signing the Agreement
Once you’ve reviewed the PPA rate and understand the escalator, you will sign the agreement. Most solar PPA agreements last for 25 years. However, this doesn’t mean you have to live in your home for the entire duration. In fact, longer PPA terms can be beneficial as they lock in lower fixed rates for a longer period.
Example
For instance, if you are a homeowner with with a traditional electric provider, their prices typically increase more than 2.9% annually. Signing a solar PPA can provide significant long-term and immediate savings, not as much as purchasing or financing the solar system outright, but still substantial savings.
Most electric companies break down their charges into multiple items, with the two primary components being generation and delivery. Homeowners see these reflected in their electric bills, where they pay for both the production and transportation of electricity.
Since utility companies own and maintain the grid, it’s understandable that they charge for delivering power. These charges, typically measured in Kilowatt per Hour (kWh), vary among utility companies. Generation costs often outweigh delivery costs. For instance:
Typical electric company price breakdown:
- Generation: $0.10 per kWh
- Delivery: $0.05 per kWh
- Total cost: $0.15 per kWh
If you used 1,000 kWh in August, your electricity cost would be $150 ($0.15 per kWh x 1000 kWh).
If the solar provider is offering a PPA rate at $0.12 per kWh, you are saving money. And remember, the $0.15 electric company rate will go up every year. So will the solar PPA but locked in at a 2.9% escalator.
In this example, over the course of 25 years, you would pay your utility company $103,000. In the same time frame, paying for a solar system through a PPA instead of traditional electricity would cost you $52,000. So the savings in this hypothetical but realistic example would save you $51,000.
The Drawbacks of a Solar PPA
When evaluating a solar PPA, it’s important to remember that the drawbacks often depend on your individual goals and circumstances. Every solar option, be it outright ownership, leasing, or a PPA, has its own set of pros and cons, but they all offer significant advantages over traditional electricity and utility providers.
Here’s a closer look at the potential downsides:
1. Less Long-Term Savings
Compared to outright ownership, a solar PPA generally offers less savings over the life of the system. When you own the system, you benefit directly from 30% federal tax credit, which can significantly reduce your overall costs. With a PPA, you don’t receive these incentives directly, though they are reflected in the lower cost of the solar electricity you buy.
2. Ongoing Monthly Payments
While you avoid the high upfront cost of purchasing a solar system, you will have monthly payments under a PPA. Although these payments are often lower than your current electricity bill, they would add up to be more than what you would have paid for your solar system outright.
3. Escalator Clauses
Many PPAs include an annual escalator clause, which means that the price you pay for electricity increases each year. While this escalation is often modest and less than the average increase from your utility provider, it can still lead to higher costs over the life of the agreement compared to fixed-rate ownership options.
Perceived Disadvantages of a Solar PPA
While the above are some PPA disadvantages in comparison to a few of the other ways you can acquire solar, below are some common misconceptions often perceived as disadvantages. It is important to bring truth and clarity to these often cited solar PPA negatives:
1. You Don’t Own the System
One of the most frequently mentioned concerns is that you won’t own the solar panels with a PPA. While it’s true that you’re not the owner, this doesn’t mean you’re missing out on the benefits of solar energy.
Ownership brings certain advantages like direct tax credits and potential increases in home value, but it also comes with responsibilities such as system maintenance and initial investment. A PPA allows you to enjoy the benefits of solar energy without these responsibilities.
You’re essentially renting the energy produced by the panels, which means you get to lower your electric bills from day one without the large upfront cost. Plus, you have the option to buy out the system if you decide you want to own it later.
2. Complications When Selling Your Home
Another perceived disadvantage is that selling a home with an active solar PPA can be complicated. While there might be additional steps involved, many PPA agreements offer options for transferring or buying out the contract.
Many buyers are attracted to the lower, fixed energy costs offered by a solar PPA. Additionally, PPA providers often include options for buying out the contract at a reduced cost after several years, which can be an attractive feature for potential buyers.
3. Can’t Claim Solar Incentives
While this is mostly true, the reason behind this is with a PPA, it is considered Third-Party Ownership. Meaning the solar company you are contracting with owns that system, which as we’ve been discussing can be a good thing since you don’t have to worry about maintaining the system.
So since the solar company owns the system, they have to claim the tax credit. This is the reason why you are able to get the installation of the solar equipment done for free. They use that tax credit to fund the labor and parts involved to install on your roof.
The state incentives are also applied to the monthly payment, giving you more direct savings in the form of a lower monthly solar bill.
And to be completely honest, a lot of people that opt-in for a solar PPA prefer the fact that they don’t have to facilitate the tax credits and local state incentives themselves.
Average PPA costs and savings
| Average Electric Bill | System Size (kW) | Panel Count | Purchase Price Before Incentives | Purchase Price After Incentives | Monthly Payment Before Incentives | Monthly Payment After Incentives | 25-Year Savings |
| $75 | 5 kw | 12-14 | $0 | $0 | Approx. $60/month | Approx. $60/month | $23,460 |
| $150 | 10 kw | 24-28 | $0 | $0 | Approx. $120/month | Approx. $120/month | $49,755 |
| $300 | 18 kw | 44-48 | $0 | $0 | Approx. $240/month | Approx. $240/month | $103,780 |
Your Goals Matter
The disadvantages of a solar PPA are not necessarily deal-breakers, rather, they depend on what you’re looking to achieve with your energy goals.
Here are some key considerations to help you determine if a PPA is the right choice for you:
- Financial Flexibility vs. Long-Term Savings: If you’re focused on achieving immediate financial relief without an upfront investment, a PPA could be ideal. While it might not offer the same level of long-term savings as outright ownership, it provides immediate reductions in your electricity bills and eliminates the need for a large initial payment. If long-term financial gain is your primary goal and you have the funds to invest upfront, ownership might be more appealing.
- Maintenance Concerns vs. Hassle-Free Energy: A PPA offers a maintenance-free solar energy solution. If you prefer a hands-off approach where the solar company takes care of everything from installation to repairs, a PPA fits your needs. On the other hand, if you’re keen on owning the system and handling maintenance yourself for potential future benefits, you might consider other options.
- Short-Term Solutions vs. Long-Term Investment: A PPA is a great choice if you’re looking for a short-term or medium-term solar solution without a significant upfront cost. It’s perfect for those who want to start saving money on their electricity bills right away and aren’t necessarily concerned about the long-term financial implications. For those who are planning for the long haul and can invest in the system, ownership might offer better returns over time.
Comparisons to Other Solar Options
Ownership vs. PPA:
Ownership will provide more savings than a PPA but will require a significant capital investment. A PPA requires no money out of pocket but savings are less over the lifetime of the system.
Leasing vs. PPA:
No real noticeable difference. Savings and monthly payment are nearly identical.
Financing vs. PPA:
A bit more savings longterm with a financed solar system but monthly payment will be higher than a PPA. Sometimes the finance monthly payment may even be a bit higher than the electric bill starting out.
For more information regarding all the different ways to go solar, you can read our extensive article here on the different solar financing options.
Traditional Electricity Providers vs. PPA:
When compared to traditional electric and utility providers, a solar PPA stands out for several reasons:
- Cost Efficiency: A solar PPA typically offers lower electricity rates compared to what you pay your utility company. With a PPA, you pay for the electricity generated by the solar system at a fixed rate, which is usually lower than the rate charged by your utility provider.
- Environmental Impact: By choosing a PPA, you’re supporting renewable energy and reducing your carbon footprint. This is a significant advantage over traditional fossil fuel-based electricity sources, which contribute to climate change and environmental degradation.
- Financial Accessibility: Traditional electric providers require no upfront investment but also offer no significant savings or benefits. In contrast, a solar PPA requires no upfront cost and provides immediate savings, making solar energy more accessible to a broader range of people.
- Peace of Mind: With a PPA, you don’t have to worry about system maintenance or performance issues. The solar company manages these aspects, providing a worry-free solar experience compared to traditional utility arrangements where you have no control over pricing or service quality.
Who is this best for?
A lease or PPA is best for homeowners that want the most hands-off, out of sight, out of mind experience with solar. Since they do not own the solar system, they do not have to worry whatsoever about maintenance or claiming the incentives. It is the easiest way to go solar.
Who is this not suitable for?
Because a solar PPA offers very flexible terms, there really aren’t too many scenarios in which a PPA or lease wouldn’t make sense for almost anybody.
However, with that said, here is what I believe are the scenarios that would prevent a solar PPA or lease to be the best option for you:
- You have enough cash to invest in a solar system (consult your financial advisor first).
- The solar PPA option has an annual escalator above 4.5%.
- Your utility’s electric rates are lower than the available solar PPA rate.
If you meet or are facing anyone of these scenarios, then it would be best to explore a cash purchase or a solar loan (finance). For more information on exactly how a solar PPA works, please visit our article on that here: What Is a Solar PPA? Pros, Cons, and an Honest Opinion
Solar PPA FAQs
Can I buy the solar system after the PPA term ends?
Yes, most solar PPA providers include a clause in the agreement that allows you to purchase the solar system at its fair market value after the fifth year. If this option is important to you, be sure to confirm with your solar representative that it is available in your agreement.
Can I sell my home before the PPA term ends?
Yes. You have two options: either exercise the early buyout option and include a paid-off solar system with the sale of your home, or have the prospective buyer assume the remaining monthly payments.
Do I need good credit to get a PPA?
Most solar PPA providers require a credit score of at least 650.
What if I change my mind and decide I no longer want solar?
You can either transfer the agreement to the new homeowner if you sell your property or buy out the contract based on its terms. Before signing anything, make sure you are certain about your decision to go solar, as agreements can be long-term and may have specific conditions.
What are the average monthly savings with a PPA vs. electric bills?
Every home is different of course, but in states like New Jersey and New York, the average savings compared to an electric bill starts out between 10% and 30% savings. The savings depends on many factors, the biggest one being the efficiency of your home.
Conclusion
A solar Power Purchase Agreement offers a range of benefits, including no upfront costs, immediate savings, and maintenance-free solar energy. While there are some drawbacks, such as less long-term savings and ongoing monthly payments, these should be weighed against the advantages.
If you’re considering solar options and don’t have the cash for an outright purchase, a PPA might be a great way to start enjoying the benefits of solar energy. For personalized advice and to explore whether a PPA or another solar option is right for you, I encourage you to schedule a virtual consultation with one of our solar experts.
Remember, no matter which option you choose, switching to solar energy will almost always be a better choice than sticking with your current utility bills.
CURIOUS ABOUT SOLAR?
It’s a lot simpler than you think!