What is the difference between a PPA and a Solar Lease?
The difference between a PPA (Power Purchase Agreement) and lease can be confusing, but there are reasons that PPA’s are good for some entities, whereas at ZDS we never recommend a solar lease anymore. Solar leases and solar PPA are arrangements where the homeowner does not own the solar energy installation on their roof, it is owned by the lease or PPA company.
Quick Difference Between a Solar Lease and a PPA:
Lease: The homeowner leases the solar panels and components, but the homeowner’s relationship with their utility and how they buy/sell electricity, such as Net Metering, is no different than someone who owns a solar panel system. The homeowner pays fixed monthly a fixed amount for the kWhs used for the duration of the lease term, usually 20-25 years, and if the utility (ex SDGE) changes their rate structure, the rate of the lease may become unattractive.
PPA: The homeowner neither owns nor leases the solar system. The PPA company installs their own system on the roof and sells the homeowner the electricity it produces at an agreed upon amount. The main difference is that ZDS PPAs include the option to own the solar system after a few years- usually 6 years. PPA contracts usually last 20-25 years.
While the terms “solar lease” and “solar PPA” are used interchangeably on this page, and are very similar in practice, there is a key difference between the two. With a solar lease, you agree to pay a fixed monthly “rent” or lease payment, which is calculated using the estimated amount of electricity the system will produce, in exchange for the right to use the solar energy system. With a solar PPA, instead of paying to “rent” the solar panel system, you agree to purchase the power generated by the system at a set per-kWh price and also have the right to own the system after a few years- usually 6 years.
The real question is should you be financing instead?
Although using ZDS $0 down financing is usually the most practicable option, for non-profits or people unable to avail of the 22% tax credit (ITC), PPAs can be a viable alternative.
In many cases, it is better financially for a homeowner to pay cash or finance a system rather than lease or PPA. With a lease or PPA agreement, the homeowner is locked into a 20 or 25 year contract, whereas most financed (third-party solar loan) solar power systems are paid off in 12 years or less.
Another benefit to financing is the homeowner owns the system after it is paid off; unlike at the end of a lease or PPA when the homeowner only has the option of buying the system at fair-market value, or having the lease or PPA company remove it from their roof.
Unlike most PPA’s installed with other companies, PPAs via Zero Down Solar Inc, will refund approx half of the ITC rate back to the customer, so this is a good way for non-profits to avail of approx half of the ITC funds available to for profits! However, solar leasing companies claim the ITC credit for themselves.
There can also be challenges selling a home while in a lease or PPA contract, although most, if not all, lease and PPA companies allow the system to be transferred to a new homeowner, some home buyers might simply not be willing to do it. There are many cases in which the seller had to buy-out the lease or PPA contract before the buyer was willing to purchase the home. Generally speaking, a solar lease or solar PPA is the best option only when the homeowner does not qualify for financing or does not have cash.
When is a lease or PPA a better option than financing? There are only two reasons it makes sense, because at Zero Down Solar, in most cases we can help you secure a solar loan with zero money down!
People with low tax liability.
One of the major advantages to owning your solar system vs leasing or PPA is that by owning the system, the homeowner can claim the 30% ITC (investment tax credit). However, if the homeowner does not have a large enough tax liability, some or all of their ITC could go unused. But be aware the homeowner does not get the ITC in a solar lease or PPA agreement either – the solar company keeps it for themselves. This puts the solar leases/PPA on more equal footing as a finance option or cash purchased system.
People with credit problems.
Some people might not have a high enough credit score to qualify for a solar loan. The credit requirements for a lease or PPA are much lower. Credit score alone could limit people to only a lease or PPA.
When the Entity is Not-For-Profit Company
With Power Purchase Agreements (PPAs), you can reduce your electric rates and start saving on day one with little money invested upfront. This means that 25 years of power is prepaid at a hugely discounted rate and we work with Ygene on these for the $0 down financing for the PPA. Unlike most PPA’s installed with other companies, PPAs via Zero Down Solar Inc, will refund approx half of the ITC rate back to the customer, so this is a good way for non-profits to avail of approx half of the ITC funds available to for profits!
