What’s the difference between solar leases and PPA’s (power purchase agreements)? This is a question I’m asked constantly, even by seasoned solar sales reps, and if you’re reading this blog you’re likely asking yourself the same question. At first blush, there doesn’t seem to be a whole lot of difference between the two solar financing options, so before we dive headlong into the differences, let’s first examine what they have in common.
Both solar financing options have these similarities:
- $0 down or low upfront financing
- Prepaid options that are cheaper than paying cash
- Energy production guarantees (be sure to read the fine print here)
- Maintenance and warranty for the term of the agreement
- End of term options
- Buy the system for FMV (fair market value) or residual value whichever is more
- Extend the agreement for another 5-10 years
- Remove the system (another place to really understand the fine print)
- System monitoring
Since above items are the ones most typically covered in the sales pitch, it’s easy to lose sight of any differences between solar leases and ppa’s, but there are very real differences between the two and savvy consumers should understand these differences before they commit to a 20-25 year agreement.
In the simplest terms, with a lease you rent equipment. Many of us have leased automobiles and leasing solar is no different, you are leasing (renting) the hardware. While most solar leases today include production guarantees, you the consumer are responsible for several items in order to qualify for said production guarantee. One common item leases make you responsible for is the cleaning of your solar panels. In other words, if you don’t keep your solar panels sparkling clean, you can throw your production guarantee out the window! Cleaning solar panels (unless you do it yourself) can cost $100+ per cleaning, so you’ll need to subtract this cost from your annual lease savings depending on how often you have your panels cleaned (usually once or twice a year depending on location). Another often overlooked aspect of leasing (renting) equipment is that you, the consumer, are responsible for making EVERY LEASE PAYMENT regardless of whether or not the solar system is actually producing power. Yes, you read that correctly. In most leases, it doesn’t matter if the solar system is actually producing power; you are still responsible for making the payment. Tree falls on your house; you still need to make the payment. Your house burns down; you still need to make the payment. Crazy, right? Who would sign this kind of deal? Sadly, it happens every day. While not every solar lease is this egregious, many are and the sage words caveat emptor ring true. Remember, with a solar lease (or lease of any kind) you’re ‘renting’ equipment and the productivity of the equipment is secondary to the rent payment. Consider this, if you lease a car and get in an accident, do you have to make the lease payment while the car sits unproductively at the body shop? Damn straight you do and it’s the same with the majority of solar leases. This is why (if you’re considering a lease) you need to read the contract carefully.
PPA’s (power purchase agreements) are structured very differently. You, the consumer, pay for power (electricity) at a rate generally equal to or lower than the rate you currently pay your utility. You are not renting equipment, you are buying electricity. How is this different from leasing? No power = no payment. That’s right, unlike a lease, if the solar system becomes unproductive, you don’t have to pay for the electricity since there is none. If a tree falls on your solar system, you don’t have to make a payment since the solar system isn’t making any power for you to buy. Keep in mind, though, you’ll make up for this lost power by purchasing it from your local utility. Still this is a much better scenario than having to make a lease payment AND having to buy the lost electricity from your utility (in essence paying double). Purchasing power versus renting equipment is the single biggest difference between these two solar financing products and the most significant, but there is another very important difference between the two and it can dramatically impact your long term savings.
Most, if not all, solar financing products have an escalator option. What this means is that the price you pay your solar provider ‘escalates’ or increases every year. The escalator you agree to pay could be as little as 0% or as much as 3.9%. The tradeoff between no escalator and a high escalator is what you pay monthly now versus later. For example, a 0% escalator means a higher monthly payment now, but the rate NEVER CHANGES while a higher escalator means lower monthly payments now, but those rates increase every year (from 0.9% to 3.9% annually depending upon the option you choose). When you choose an escalator and lower monthly payments now, you are betting that utility rates will continue to rise faster than your lease/ppa payments. Regardless of the path you choose, you need to understand that leases and ppa’s treat escalators very differently!
The difference is quite simple, but most consumers simply don’t know enough (and understandably so) about how solar power works to grasp this little wrinkle, and the wrinkle is this:
Solar leases escalate your monthly payment while PPA’s escalate your price per kilowatt hour
What does that matter, you might be asking yourself. I assure you, it matters tremendously!
Let’s assume that your solar system will produce 0.5% less power each year (a solar industry accepted standard) and your solar system produces an average of 1,000 kilowatt hours per month (12,000 per year) in year one. Let’s then assume that your payment is based on a rate of $0.19 per kilowatt hour. In year one, both the lease and the PPA have an annual cost of $2,280 or $190/month. If we then attach a common lease/ppa escalator of 2.9% to each the difference becomes apparent over time. Since the solar array will produce less power in year two (0.5% less on average as the panels degrade), the ppa monthly payment will increase to $194.85 while the lease payment will increase to $195.51. Small difference right? After all, it’s only $7.92 per year. What’s the big deal?
Remember, with a PPA you’re paying for electricity so as the panels degrade over time, your solar system is making less of it. A lease payment is based on equipment rental and it doesn’t matter if the solar asset becomes less productive over time. Let’s fast forward ten years and see how compounding impacts monthly savings between these two financing mechanisms.
In year ten, the lease payment (at 2.9% annually) has become $245.75 per month, while the PPA payment has become $234.91. Now the difference is $10.84 per month or $130.08 per year. In other words, the annual savings delta between the solar lease and PPA has increased 16.5X over ten years.
Finally, let’s check in at year twenty. While the PPA monthly payment has increased to $297.36 the solar lease payment has increased to $327.07. This is a difference of $29.71 per month or $356.52 per year (an increase of 45x over the $7.92 in year one). No wonder Einstein called compound interest the most powerful force in the universe!
In fact, over the course of the 20 year agreement you’d make $60,645.07 in lease payments versus $57,575.21 in PPA payments. This is a difference of $3,069.86 for essentially the same thing. If you factor in $100 per year for panel cleanings (to maintain the lease’s production guarantee) the difference grows to $5,069.86 not accounting for inflation! If you plug a 0% escalator into example above, your lease payment stays the same while you PPA payment actually goes down (remember you’re getting less electricity each year).
While I strongly encourage homeowners to understand every aspect of any 20-25 year solar agreement they are considering (including insurance, production guarantee obligations, transferability, end of term options, etc) understanding the difference between buying electricity and renting equipment is paramount for all of the reasons discussed above. In the humble opinion of this author, PPA’s are the more consumer friendly as a rule since the consumer only pays for the electricity he receives and the annual escalator (if applicable) applies to kilowatt hours produced and not to an established monthly payment. Lastly, since a PPA provider receives no payments for unproductive solar systems and lower payments for under-producing systems, it’s in the PPA’s interest to maintain these systems if they are to receive expected payments. Since leases have the consumer on the hook for payments regardless of system productivity and often place maintenance burdens (such as solar panel cleaning) on the consumer, they are less incentivized by design to maintain their systems for the consumers benefit and by extension, to honor production guarantees (since dirty panels give them a contractual ‘out’).
Having spelled out the differences, you may decide a lease is a better option for you for reasons not discussed in this article. There are many other aspects of solar financing to cover beyond these two points that could influence your decision to choose one over the other. The important thing, again, is to take the time to understand what you’re signing up for and whether you’re comfortable with the contractual terms and conditions of these long term agreements. Understanding the structural differences of these two solar financing products is a great first step.
If you would like to better understand whether a lease or PPA makes sense for you, HelioPower representatives are available to provide you with a no pressure complimentary solar financing evaluation. Visit www. heliopower.com or call 1-877-652-7888 for more details.