Introduction

Whether you just got done meeting with a solar salesman and he presented to you a solar PPA and you’re a bit skeptical or you just heard about it in passing and you want to learn all about a solar PPA, this article is for you.

Table of Contents

1. Introduction
2. What is a PPA?
3. What is a Solar PPA?
4. Understanding Your Current Electric Bill
5. Comparing Solar PPA with Traditional Utility
6. Pros and Cons of a Solar PPA
   • Pros
     • Most Immediate Savings
     • Similar To How You Are Getting Power Today
     • Zero Upfront Costs
     • You Don’t Make Any Payments Until Solar System Is Turned On
     • Option To Purchase System
     • Better Warranties
     • Option To Prepay At A Discount
     • Lower Credit Requirements
     • Incentives are Done For You (hands off)
     • No Tax Liability
     • Unsure of Home Timelines
   • Cons
     • Monthly Payment (You Don’t Want One)
     • Annual Escalator
     • Longer Payment Terms
     • Less Overall Savings
     • Cannot Claim the Federal Tax Credit
     • No Incentive With Early Buyout Option
7. My Honest Opinion

What is a PPA?

A Power Purchase Agreement (PPA) is a contractual arrangement where you agree to buy electricity directly from a provider.

This is the exact arrangement you have with your utility company, your provider supplies power, and you commit to purchasing it.

Skipping out on utility payments can literally leave you in the dark and even impact your credit score. Let’s face it: electricity isn’t free. Whether it’s sourced from the sun, wind, or water, there’s a cost involved.

While off-grid living offers some freedom, it still requires upfront investment. Despite the huge uptick of renewable energy, most residential areas in the US remain grid-tied.

What is a Solar PPA?

In the simplest explanation, a solar PPA involves purchasing the power generated by a solar system installed on your home.

Unlike a solar lease where you rent the panels, with a PPA, you’re buying the energy produced. All the energy that the system produces is yours, even the extra power that you don’t use.

You enter into an agreement with the solar provider to purchase this power at a fixed price per kilowatt-hour (kWh), typically lower than what your utility provider charges. This often translates to immediate savings on your electricity costs.

Understanding Your Current Electric Bill

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:

• Generation: $0.10 per kWh
• Delivery: $0.05 per kWh
• Total cost: $0.15 per kWh

For example, if you used 1000 kWh in August, your electricity cost would be $150 ($0.15 per kWh x 1000 kWh).

Now that you know how a typical electric company charges their customers, let’s compare that to a solar PPA.

Comparing Solar PPA with Traditional Utility

When opting for the solar PPA route, most states and solar companies offer the entire solar system and installation upfront at no cost, provided homeowners meet specific conditions such as a good credit score. This means you can have a complete solar system installed on your home without any initial investment.

The agreement guarantees that the system will produce a predetermined amount of electricity at a fixed cost per kWh.

This pricing model mirrors that of traditional electric companies, where the cost is based on the amount of electricity consumed (kWh).

If the solar energy cost per kWh outlined in the agreement is lower than that of your electric company, you’re saving money!

The extent of these savings depends on various factors such as equipment quality, warranties, maintenance coverage, workmanship, and system efficiency. Remember, quality comes at a price.

Now that we’ve clarified what a solar PPA entails and how it stacks up against traditional utility services, let’s dive into the pros and cons of opting for a solar PPA.

Pros and Cons of a Solar PPA

Pros

1. Most Immediate Savings

Compared to any other monthly payment option for solar (finance or lease), a PPA will typically start you out with the lowest monthly payment. 

2. Similar To How You Are Getting Power Today

Homeowners often struggle to grasp the concept or see the value in investing in or making monthly payments for solar equipment that they don’t outright own, like with a solar lease. Therefore, the idea of purchasing power at a lower rate than their traditional electric provider offers can be highly appealing.

Opting for a Power Purchase Agreement (PPA) presents an easy transition to solar for homeowners who are hesitant about significant changes.

This approach mirrors their current method of getting electricity, making the switch seamless.

Clearly, the advantages of sourcing power directly from solar panels rather than relying solely on the grid are obvious.

3. Zero Upfront Costs

If the homeowner has a decent credit rating, usually between 650 and 690, then the provider of the PPA will allow the homeowner to not part with any money and will be approved for the entire installation and equipment at no charge.

You’re not cutting a check for any amount at the time of sale.

4. You Don’t Make Any Payments Until Solar System Is Turned On

This may not be across the board, but a reputable solar company will offer a PPA term that states that you don’t make any monthly payments until the system is activated. So you don’t need to worry about making payments to your utility provider and for your solar system while waiting for your solar system to be activated.

With a solar finance program, payments start a bit sooner which means you may be making payments for the system before it is even generating power.

5. Option To Purchase System

Depending on the company you’re contracted with, the option to purchase your solar system somewhere along the term typically applies to any solar option like a lease or finance.

With a PPA, some companies offer the option to purchase the solar system at a certain milestone or year. Obviously the earlier the better. 

Make sure you know at what point along the term you can exercise your option to purchase and you should know the estimated value of the system and its depreciated amount before you sign anything.

It won’t be exact because the purchase amount would be at FMV (fair market value) but your solar representative should be able to give you a very close idea in writing.

6. Better Warranties

This is dependent on the individual solar company you are working with but industry standards give PPA’s better coverage and guarantees.

PPA providers should guarantee the power output with a money back guarantee.

This means if your system didn’t produce the power promised to you and that caused you to have a higher than expected electricity bill, then you would be reimbursed for what you owed the utility company. 

7. Option To Prepay At A Discount

Similar to the buyout option, but with a bit of a twist, prepayment of your PPA or lease entails making a lump sum payment equivalent to all your future monthly payments. However, here’s where it may be an attractive option: you’re offered a discounted rate for this upfront payment.

For instance, if your monthly PPA payment amounts to $120, opting for prepayment might reduce it by 30% to 40%. So instead of paying $120 monthly, you could end up paying around $84 a month if you prepay for all of the remaining months.

While you won’t technically own the system, rest assured, you’ll still retain all associated warranties.

8. Lower Credit Requirements

A solar PPA provider often maintains more lenient credit eligibility criteria compared to financing options, making it more accessible to individuals with less-than-perfect credit scores.

While a credit score of over 650 is typically required, the threshold is generally lower than that of financing options, offering a viable solution for those with less-than-ideal credit histories.

9. Incentives are Done For You (hands off)

Surprisingly, one significant reason people opt for the PPA is the convenience of not having to navigate the process of filing for federal tax credits and ensuring receipt of state incentives.

While some individuals may enjoy managing their paperwork, many are increasingly drawn to the hands-off approach offered by PPA providers, who handle the entire process seamlessly.

10. No Tax Liability

Aside from individuals disliking the idea of handling their credits and incentives, there’s another group to consider: those who aren’t eligible for the federal tax credit.

Although this scenario is uncommon, it does occur, mostly among homeowners with minimal to zero tax liability.

For such outliers, a PPA often becomes the preferred choice, as it enables them to indirectly benefit from a portion of the federal tax credit.

By opting for a PPA, they can have the solar system installed at no upfront cost, providing an attractive alternative.

11. Unsure of Home Timelines

Technically speaking, it doesn’t matter how you acquired your solar in the event you sell the home. Cash, finance, PPA, lease, nowadays the act of selling your home with solar is not only a benefit for the buyer and seller, but the process is much easier and depending on the company that provided it to you, quite seamless. At least it should be. 

Many homeowners believe that if they are not going to be in the home for a while, then cash is the way to go because selling the home and transferring their solar contract is going to be a detriment.

This couldn’t be further from the truth.

Yes, there might be an extra piece of paperwork, (1-2 page form to fill out) but it is technically not any different.

The truth is, if you are not sure how long you are going to be in the home for, then not parting with any cash and just getting the system installed with no upfront investment is a very strategic move.

If you find yourself selling the home 5 years down the road, you’ll find that you will have just as many, if not more home shoppers vying for your clean energy, low electric bill home no matter how the solar system was financed.

Related articles:

The Truth About Selling a Home With Solar

Cons

1. Monthly Payment (You Don’t Want One)

It’s quite possible you are someone who truly is trying to rid themselves of any and all monthly expenses, including utility bills. If this is the case, then a PPA would not be right for you since there are monthly payments for your electricity just like you are paying now.

Yes, the monthly payments will be less than what you are currently paying to the utility provider, but there are still monthly payments.

2. Annual Escalator

Part of a PPA program consists of the solar payment increasing a certain percentage on an annual basis.

This exists because of the extensive warranties and maintenance that is included in your PPA.

So just like traditional electricity from the grid, solar energy through a PPA also increases.

However, the annual increase is nominal compared to electric companies.

Industry standard for an annual increase on solar (annual escalator) is 2.9%. This increase/escalator is usually 100% to 300% less than your utility provider’s increase but some homeowners may just want a fixed monthly payment with zero increase.

Fixed payment options do exist with PPA’s but are usually dependent on where you live and the monthly payment will be higher starting out.

You can also get a fixed monthly payment with a finance option but again, your monthly payment will be much higher than that of a PPA.

3. Longer Payment Terms

A PPA term industry standard is 25 years. Theoretically, the longer the better because it means you are guaranteeing your low rate for a long time.

However, some homeowners may prefer shorter payment periods where you have more term options with a financed solar system.

4. Less Overall Savings

Most of the time, the primary goal of a homeowner going solar is to get the lowest monthly payment for their electricity. This is where a PPA shines.

Some homeowners want the lowest overall cost of electricity, this is where cash shines. 

Related articles:

Should You Purchase Your Solar System Outright With Cash?

5. Cannot Claim the Federal Tax Credit

If one of the goals in acquiring solar is to get a cash injection provided to you by the IRS (solar federal tax credit), a PPA will not achieve this.

You would have to finance your solar in order to claim and receive the solar tax credit.

Remember, homeowners that choose the PPA route still participate in the IRS’s incentive just in an indirect way. Without it, the installation would likely not be provided at no charge and the monthly payments on a lease or PPA would be higher. 

6. No Incentive With Early Buyout Option

If you decide to exercise the option of purchasing your solar system somewhere along your term, you would get the solar system at a significant discount, however, you wouldn’t be eligible to file for the tax credit even though you purchased the system with cash.

My Honest Opinion

It may appear that I’m biased towards a PPA considering all the pros on this article but this is my honest opinion. I have been helping homeowners acquire their dream solar systems for years before a PPA was even an option and it is truly fantastic and one of the best ways to go solar. Of course everyone is different and for those who truly are trying to eliminate monthly bills or who want an immediate injection of cash may want to go another route, The best thing about solar in general is that any which way you decide to go solar whether cash, loan, lease, or PPA, is better than your current situation with your utility company, provided their is savings either short term or long term.

I hope you read our other articles about cash and finance and posts related to the matter. That way you can have all the information to decide which option might be the best one for you. And if more information is needed and your questions aren’t answered in our blog or in our Learning Center, then we encourage you to schedule a 30 minute virtual consultation to speak with one of our experts who can provide you with more information in greater detail. We look forward to speaking with you.