What Is a Solar PPA?
May 3, 2022
A solar power purchase agreement (PPA) is essentially a financial arrangement between a developer and a customer. A developer will arrange the overall design, financing, permitting and installation of a solar panel system on a customer’s property.
Solar PPAs are a popular financing option for those considering going solar in the U.S. because they allow you to install home solar on your roof (or anywhere else on your property) for no up-front cost.
However, there are some downsides, despite their $0 down payment requirement. Here, we’ll look at how solar PPAs work, their pros and cons, and market policy details to see how much you can save on your electricity bill.
How Does a Solar PPA Work?
A homeowner (or host customer) can sign up for a solar PPA with their solar developer/installer and agree to its contractual term length. Solar PPA contracts usually range between five and 25 years.
The solar developer will then install panels on your property (usually on a roof). Any generated solar energy will cover the home’s electricity usage for the contract’s term. However, this energy isn’t just handed over to the host customer free of cost.
The developer resells the generated power to the homeowner at a fixed rate. This rate is lower than the local utility’s retail rate. If it were higher, solar PPAs wouldn’t necessarily be worthwhile, unless the sole purpose was to use clean, renewable energy.
Any extra solar energy the panels produce goes to the local grid. Fortunately, you can take advantage of net metering if a program is available in your area. And net metering offers benefits — but only to an extent.
Because the solar developer technically owns your solar panel system, you can’t receive federal incentives. like the solar investment tax credit (ITC). You’re also ineligible for local rebates and incentives, like the solar renewable energy credits (SRECs) commonly associated with net metering.
The developer is also responsible for any needed solar panel maintenance, repairs and replacement throughout a solar PPA contract. But once a contract term ends, customers can extend their contract, have the panels removed or buy the system.
Solar PPA Pros
Here are the pros you can look forward to when signing up for a solar PPA.
Low to No Up-Front Costs
Developers handle the up-front costs associated with solar panels in terms of sizing, acquiring and installing a system. So, you can enjoy a solar panel system with a potential 0% down payment and start saving with solar as soon as the system runs.
Reduced Electricity Rates
Homeowners benefit from a fixed electricity rate from the developer. This helps household budgeting because monthly electricity costs become more predictable. Your rate can be structured in two ways:
- Fixed escalator plan. Under this plan, a customer pays rises in electricity costs at a predetermined rate (typically between 2% and 5%). This is often much lower than rates from a utility company.
- Fixed price plan. This plan maintains a constant rate throughout the entire solar PPA contract term. So as utility prices increase over time, which they usually do, customers can rely on the same rate for years.
No Repair or Maintenance Responsibility
Because developers technically own the solar panels under a solar PPA, they’re fully responsible for any necessary repairs or maintenance.
Let’s say inclement weather (such as a hurricane) damages your panels, or they operate at a low performance. Your developer is responsible for fixing and maintaining your panels, as well as ensuring they operate at full performance capacity.
Better Leverage Over Incentives
Developers benefit from solar PPAs because they’re better positioned to take advantage of tax credits to reduce the system’s overall cost.
For example, if you’re a municipal host customer or another public entity without taxable income, you can’t use certain tax credits. These customers aren’t eligible for the solar ITC, for example, because it’s exclusive to residential solar.
Increase in Property Value
Customers also benefit because solar panel systems increase home value.
Because the nature of solar PPAs is long-term, agreements can transfer among property owners. This helps boost the property’s attractiveness when it comes time to sell. But this is only if the new owner wants solar panels on their residence — otherwise, the panels have to be removed.
[Related: Deinstalling and Reinstalling Solar Panels]
Solar PPA Cons
Here are the cons concerning signing up for a solar PPA.
Missing Out on SRECs
SRECs generally represent excess solar energy bought by a utility company. If your solar panels produce more energy than your home needs to run, you can sell the excess energy to your utility. It’ll typically offer you SRECs in return.
However, host customers don’t receive any SRECs from panels under a solar PPA — the developer does.
Lack of Financing Options
For those going solar, both the fixed escalator plan and the fixed price plan are viable options under a solar PPA. Many people also like the fact that you can often pay $0 outright.
But purchasing a solar panel system on your own has its own benefits. Many solar panel providers such as Freedom Solar offer unique financing plans with interest rates as low as 0%, $0 down payment options and a competitive warranty that makes going solar easy.
Upgrades to Your Property
As we noted, the developer is responsible for designing, installing, operating and maintaining your solar photovoltaic (PV) system. However, host customers are responsible for other costs.
This could mean trimming tree branches that block the sun from directly hitting your panels or doing something else that supports the installation or lowers the installation cost. You’ll also have to comply with local ordinances that might entail project management costs, like system inspections and HOA approvals.
Potentially Higher Property Taxes
Although solar PV systems are a great way to increase your home’s resale value, they can increase your property taxes. Some states such as Colorado offer property tax exemptions, but many others don’t offer this type of incentive. You’ll have to research the rebates and incentives specific to your area to know for certain.
[Related: What to Know Before Installing Solar Panels]
A Note on Solar PPAs and Market Policy
Signing up for a solar PPA is a great way to avoid up-front costs related to purchasing a solar panel system. But PPAs also help you avoid costs involving equipment, labor, installation, maintenance and repair.
Using a solar panel system under a solar PPA is also often a simpler process for customers to follow. Host customers don’t have to bother knowing which federal incentives, tax credits or local rebates they qualify for.
But solar PPA models often face legislative challenges that would otherwise help regulate developers as electric utilities. Because host customers essentially buy back the electricity from the panels installed on their homes, developers are similar to utilities.
Sometimes customers aren’t fully comfortable with signing a solar PPA, so they lean toward leasing solar panels instead. The two options are very similar, but companies that lease solar panels don’t sell the electric power generated from panels.
However, a third-party entity owns the solar panel system in both cases.
Contact Freedom Solar to Start Using Solar Power
Freedom Solar is here to help if you’re looking to purchase your own SunPower solar panel system. We’ll work with you to create a financing plan that matches your budget with interest rates as low as 0% and a $0 down payment.
To speak with one of our solar specialists, call (800) 504-2337 or complete our contact form for a free consultation.
Featured image via Pixabay