Those who don’t have the cash to buy a solar array outright or those who want to avoid a loan might turn to the two other popular options: the solar lease or the solar power purchase agreement. The PPA is very similar to a solar lease, but there is one distinct difference:
With a PPA, there is no rent: the homeowner simply agrees to purchase the power generated by the system at a set price per kilowatt.
The solar lease requires a fixed monthly payment, or “rent” of the solar panels. This payment is in exchange for the right to use the system.
Choosing solar is becoming an increasingly popular decision for homeowners, and for good reason: According to the Lawrence Berkeley National Laboratory, the cost of power through PPAs has been dropping in recent years, and is now regularly signed at $.05/kWh or less. This page will detail some of the pertinent information on PPAs, but you can also find important details on the leasing page, as some of the points are quite similar.
Read on to learn more about power purchase agreements and whether this option might be the right choice for you.
Inside the Solar PPA
Remember that the PPA works a lot like a lease, with one exception. The homeowner is buying power from the financing company and is not leasing or renting the panels on the roof. This is a very distinct but important difference. Here’s more on how the power purchase agreement works.
The contract is reviewed
Before anything else happens, the homeowner sits down with the representative of the company providing the PPA, and they look over the contract together. Any questions are addressed, clauses updated if necessary, and the homeowner has time to consider the decision before signing.
Your roof is deemed sound
Before solar panels can be installed, the roof must be up to par. This means it must be of suitable quality and soundness – a roof that is in need of replacement is not suitable for a solar installation. If repairs are needed, installation will be put on hold until the roof is repaired or replaced.
Any required permits or permissions are obtained
Some cities or municipalities require permits for the solar system; how many permits and what kind of permissions depends upon the area. Those who live in under the rules of a homeowner’s association might also need permission from the HOA in order to have solar panels installed.
The system is designed and installed
The company designs a solar array suitable for your particular roof and shading, chooses the best place on the roof for installation, and either sends out their own team or hires a subcontractor to complete the work.
The system generates power, and you pay reduced rates
The system starts generating power, and you immediately benefit by taking advantage of reduced rates. In most cases, these rates are substantially lower than what you were paying before the solar panels were installed.
The company takes care of interconnection
If there is an interconnection fee or other requirements in order to allow power to be sold back to the grid, this should be taken care of immediately. Savvy homeowners can make sure that the company handles the interconnection work.
Sometimes the array generates extra energy
When the system produces extra energy, homeowners who have been demanding about an advantageous contract can sell that extra energy to the utility company, and possibly make money on the PPA.
The company maintains and monitors the equipment
The homeowner just sits back and enjoys the savings, while the company handles everything else. Maintenance is the company’s responsibility, but it is the homeowner’s responsibility to get in touch immediately if they notice something looks wrong. The company will monitor the equipment, though homeowners might be able to get a clause in the contract that says they have access to the monitoring results as well.
Utility rates rise, but your rates remain steady
As the rates of electricity go up, the rates of the PPA stay the same, saving potentially thousands of dollars for the homeowner. Even if the PPA contains an escalator clause, it is possible that rates through the utility will rise much higher than the escalator payments.
The end of the agreement nears – you explore the options
At the end of the contract, it’s time to make a decision: Make new arrangements for the solar array (if the contract allows), plan on a new PPA agreement, or let the company remove the solar panels. Contracts are typically long-term, so there is usually plenty of time to make a decision.
Extra Energy: Earn Cash for Your Power
Some states offer net metering, which means that any energy produced by the solar panels in excess of what you actually use can be sold back to the utility for a fee. There is also the option of Solar Renewable Energy Certificates (RECs), which are generated with each megawatt-hour the system produces. In most PPAs, the company that owns the system retains the RECs. However, some contracts might allow homeowners to claim the RECs, which can then be sold. In some states, the RECs can add up to several hundred dollars each, and a home’s solar panels might generate several of them each year.
The way net metering or RECs work depends greatly upon the state or even the city.
Insider’s Guide to PPA Contracts
Understanding the PPA contract is a must. Before signing on the dotted line, here are several points homeowners need to know, as well as questions they should ask, about how their PPA contract works.
Do you know what you’re getting?
Do you know exactly what will be installed?
Though the equipment will not belong to you, it will be placed on your roof, so it pays to know what will be up there. In addition to knowing the manufacturer, technical specifications and the like, it’s very important to know how the array will be installed, the size of it, where it will be installed, etc.
Do you know if there is a take-or-pay clause?
What if the utility does not want to buy any excess electricity produced, or buys it at a steeply discounted rate? The contract should spell out if you will have to pay for only the electricity you use or if you must pay for all the electricity produced.
Do you know what the energy prediction is?
How much power will the solar array generate? The contract should say what the company believes will be produced every year, given the factors that make your particular array and home site unique.
Do you know who covers interconnection charges?
“The best PPAs would cover the hook-up (interconnection) charges that cover the cost to tie in the production to the power lines that enable the homeowner to sell excess power,” Kowal said. “Otherwise, what happened in Nevada recently could affect how much the homeowner makes from the sales. Nevada recently lowered the amount that homeowners receive for solar power while at the same time, increasing the amount for monthly charges to hook up with the power lines that their homes are connected to in order to sell power. A double-whammy to watch out for!”
Do you know if there is a fixed price or escalator?
The fixed price plan will cost a bit more initially than the escalator plan. However, the escalator plan can drive up prices annually, usually by 2 to 5 percent, which means that over a long period of time (such as a 20-year agreement), the homeowner might wind up paying the same or even more as what the utility company would charge a neighbor who did not have solar panels.
Do you know if you can get monitoring data?
Having the data that proves the system is working as expected is very important, though some PPA contracts call for that data to be gathered and scrutinized by the company, not the homeowner. It might be a good idea to request a clause in the contract that states you will have access to the monitoring data as well.
Do you know the payment schedule?
The bill for the solar power might be separate from the bill sent from the utility company. The contract should explain exactly how this works, including whether you will receive one or two bills, when they will be sent, and when they will be due.
Do you know if the rates are competitive?
“Homeowners need to balance the rates of a long term PPA over what the spot market is expected to be over the same period for the power generated by their solar panels,” Kowal said. “Local utilities (or even some co-ops) often need to file their expectations with the state public utility commission.”
Do you know what happens if you sell your home?
Look for an option in the contract that allows the original homeowner to transfer the PPA contract to the new buyers. If this is not possible, make certain what the rules are for selling your home when you have a PPA in place.
Do you know what happens when the contract ends?
There might be a purchase option at the end of the contract; find out how the pricing will work when that does happen. Some companies will plan to decommission the system and remove it from the home. if that is the case, ensure the contract states explicitly how they will repair the roof after removal, and how the company will handle any damage to your property as a result of the removal.
The Future of PPA
While third-party financing models are still popular, they have seen a decline in recent years, according to the Solar Energy Industries Association. For instance, Colorado first entered the third-party financing solar energy market in 2010; by the middle of 2011, third-party installations made up for 60 percent of all residential solar power, and by the middle of 2012 that number had risen to 75 percent. This played out in much the same manner across other states that allowed PPAs.
In states like New Jersey, where 83 percent of residential solar systems installed over the last four years are third-party owned this method of financing is still going strong, however, this is not the case across the nation. Take for instance California, the country’s leader in solar. In 2013, 72 percent of residential systems were financed by third party. By 2017, that number had dropped to 32 percent. The future of third-party financing might be in the commercial sector. In 2017, more than half of all non-residential projects in the U.S. were third-party owned, an increase from previous years.
Neverless, PPA or lease will continue to be a viable option, especially for those homeowners who prefer to enjoy the benefits of solar power but don’t want to deal with the hassle of figuring out all aspects of system ownership.