In this guide, you’ll learn everything you need to know about solar power purchase agreements (PPA) and buying or leasing solar panels for your home.
With so many choices, it can get confusing quickly, and getting it wrong can lock you into a contract that might not be the best choice for you and your family.
The question is which solar energy option is best for your family and your property?
The goal of this guide is to help you make a more informed decision in answering that exact question.
Let’s dig in and examine the features and benefits, plus the pros and cons of each option.
First and foremost, we all owe some thanks to the creation of solar leases, PPAs, and loans because they helped make it easy for homeowners and businesses to take advantage of solar energy and save serious money by protecting their property against the bulk of future utility rates increases.
The solar power purchase agreement (PPA) and solar lease made solar affordable for the average homeowner and small to medium-sized business.
Those two solar financing products required no down payment, and if your property is a good fit for solar panels, and your electric bills are high enough, and your credit was good, you’re likely to start saving money the very first month your solar lease or PPA system is turned on.
That ease of entry to go solar helped create the economic boom that has happened in solar energy.
Later, the solar loan came into being, which offered the same zero money down and immediate savings as the lease or PPA, but now you owned the energy system, and after the contract term, it was your’s free and clear — providing free electricity every day afterward.
This guide assumes you’re already aware of the potential financial benefits of going solar, and now want to know more about the differences between PPAs, leases, and solar loans. If it’s better for you, perhaps start with our article with “9 Reasons to Choose Solar Panels for Your Home.”
For the guide, we’ll start with short explanations of your solar financing options then move on to more detailed comparisons below.
Solar PPA (power purchase agreement)
The solar PPA company pays for the system, installs it, and connects it to the home and utility company.
The homeowner gets solar energy at a stated fixed price per kilowatt-hour (kWh) for a stated amount of time.
The PPA’s price per kWh amount should be less than what you’re currently paying for utility company electricity.
For more information, visit the EPA’s website on solar power purchase agreements.
Leasing Solar Panels
The solar leasing company pays for the system, installs it, and connects it to the home and utility company.
In a solar lease, the homeowner is renting the solar energy equipment for a fixed monthly payment.
In exchange, the homeowner receives all electricity the system produces.
The solar lease payment should be less than the homeowners current average electric utility bill, so savings starts on day one.
What’s the difference between a solar lease and PPA?
It’s a subtle but significant difference whereas the solar lease is an equipment rental and performance agreement, versus the solar PPA, which is an energy contract, where homeowners are paying for the exact kilowatt-hours (kWh) the system produced the previous month.
Both of these financial instruments usually balance things up when actual energy for the year is known, and annual adjustments are applied. So the devils are always in the details as they say.
Visit the Solar Energy Industries Association (SEIA) for sample contracts for both residential and commercial solar power purchase agreements (PPAs) and solar leases.
Pre-Paid Solar Lease
The solar pre-paid lease usually requires a $1,000 down payment, and then a single payment after installation and the system is operating with no more payments due after that.
The pre-paid solar lease has all the same features as a standard solar lease except the payment structure.
The pre-paid solar lease will generate the most savings for its term of years than any other type of solar lease or PPA.
Only a buying a system produces greater savings than a pre-paid lease over the same number of years, and even then it depends on the financing instrument of the purchase.
The pre-paid solar lease can be the perfect choice for a recently retired couple whose income is non-taxable, which prevents them from using the 30% solar tax credit, but they would still like to significantly reduce their electricity costs over the next 20 to 25 years.
The pre-paid solar lease usually provides people with non-taxable income with the most significant savings potential of all solar financing choices.
Zero money down solar loans make buying and owning your solar power system more accessible than ever.
With the same ease of entry as a lease or PPA, you can now own your solar energy system, which usually produces more significant savings.
When the solar loan is paid in full, the homeowner will own the system free and clear, and all the electricity it produces from then on is 100% free!
High-quality solar power systems are designed to last 40+ years.
Owning the solar energy system installed on your property provides the most significant financial savings over time and the most flexibility when selling the property.
When a system is purchased, the homeowner receives all tax benefits and renewable energy credits (if applicable).
Solar loan on property taxes (PACE loans)
In California and some other states, some counties have made “property assessed clean energy (PACE)” loans available.
PACE loans apply the loan and interest to your property taxes. These are public-private financing collaborations.
These PACE loans are easier to qualify for because they usually don’t take customer FICO scores into account. Instead, these PACE loans are based primarily on the available equity in the property.
Most PACE loans only credit requirements are home equity, no bankruptcy in the last two or three years, and no missed mortgage payments over the previous two or three years.
Of course, these PACE loans have higher costs than solar loans or home equity loans, which have additional credit qualifying.
Buying Solar with Cash
Not too many systems get paid with money from checking or savings accounts, but if you’ve got it, solar power puts it to good use.
Investing money in a solar power system for your home or business usually comes with excellent double-digit returns on investment (ROI).
The majority of cash deals in solar usually involve the funds coming from a home equity loan or line of credit.*
*Note that these two options usually provide the lowest cost financing options for purchasing.
What is the average price of a solar power system?
Many factors decide what the cash price of your solar power system will be.
Factors include your choice of solar panels, inverters, location of installation, and much more.
For more information on the factors that dictate the size of solar power systems, see our article entitled, “How many solar panels does my house need?”
However, let’s use a made-up example of a solar energy system purchase so we can all see how the pricing and federal tax credits work.
$30,000 = price of purchase & installation of example solar power system
-$ 9,000 = 30 percent federal tax credit [2019 only]
$21,000 = net price
The solar investment tax credit (ITC)
The 30 percent federal income tax credit applies only to those people who have enough taxable income to make use of the tax credits.
Typically, you will file for your federal solar investment tax credit (ITC) after December 31 of the year it was installed and made operational.
If your federal income tax liability was equal to or greater than your ITC, then you’ll be receiving an IRS refund or credit equal to 30 percent of the total costs of your solar energy system.
If your federal income tax liability were LESS than the amount of your ITC, you would receive a credit equal to your total liability up to your ITC amount, and the balance will roll over to be claimed next year or in following years.
If you already OWE federal income taxes, then your ITC can or will be used by the IRS to pay that debt first before refunding any excess to you.
Please consult with your tax advisor for more detailed information about the federal tax credit for solar energy systems, known as the Federal Investment Tax Credit (ITC) for renewable energy systems, and how it applies to you.
Important Tax Info: If your income is primarily from non-taxable sources like pensions, social security, municipal bonds, and other financial instruments, then purchasing a solar power system may not be your best choice because you probably won’t be able to use the income tax credit, which would make it cost 30 percent more. A lease or pre-paid lease may be a better option. Consult your tax advisor.
Comparisons of Solar PPA, Lease, and Loan
Length of the solar contract term
Home equity loan or line of credit = 1 to 30 years, usually have best interest rates, check with your bank or credit union.
solar loan = 1 to 25 years, available through solar dealers-contractors and online from Sungage Financial, Green Sky Finance, Enerbank, and other green energy or home improvement financing companies.
solar PPA = usually 20 to 25 years
solar lease = usually 20 to 25 years
Monthly solar payment
Solar loan = the homeowner owns the solar energy system and pays a monthly payment to the solar loan company or their bank’s home equity loan.
That solar loan payment is usually a fixed payment, but annual adjustable payments also exist for some solar loans.
The amount of energy the solar energy system produces each year has no impact on the monthly solar loan payment.
The solar loan is usually two loans in one because it loans you the money you expect to get back with the 30% federal income tax credit, and it expects you to pay that part back next year after you file and get the refund check.
Usually, you have 18 months to repay the expected federal tax credit refund amount, which in turn keeps your monthly solar payment level.
If you do not repay the stated tax credit loan amount when it’s due, then most solar loans will recalculate the total remaining loan amount (they had projected a lower balance after you repay the tax credit loan, but now the balance is different) and your monthly payment will go up significantly to reflect the new adjusted loan schedule.
Solar PPA = the homeowner agrees to pay a stated price per kilowatt-hour of energy (kWh) for all the electricity produced by the system.
The amount can take one of two forms; either the monthly PPA payment will fluctuate each month with exactly how much energy the system produced (the most common method) or, an estimated annual production is stated then divided by twelve months to provide a level monthly payment throughout the year.
Note that in a level payment PPA plan there is usually an adjustment every twelve to thirty-six months, called a true-up event, to reflect the actual energy delivered to the customer.
If the system underproduced per the stated contract projections then the PPA company either issues credits or rolls them over to future years or periods as the stated in the contract (it’s all in the contract, and you should be sure to read every word).
If the solar energy system over-produced in any given year of a level-payment solar PPA, then the solar PPA company will send you an invoice for the amount due for the excess energy you received. They may also calculate this based on an average of more than one year, see the PPA contract for exact terms.
Solar lease = the homeowner pays a fixed and level monthly rental price for the solar equipment.
Note that the lease may also include an energy true-up either annually or for another period (see annual true-up).
Solar loan = zero, almost all solar loans are zero money down but include an option to put money down to reduce the monthly payment if the customer wishes to do so.
Any down payment will also reduce the total interest paid and produce additional savings to the customer.
Solar PPA = zero, most PPA’s do not require any down payment, though the host customer (you) may have an option to place a down payment to make the monthly payments lower.
Solar lease = zero, solar leases do not require any down payment, though most do permit that option if the customer wishes to reduce monthly payments and save money over the life of the contract.
Pre-paid lease = usually a $1,000 down payment is required to start the project.
A payment escalator is a clause in the solar financing contract that allows the monthly payment to go up every year, usually at a rate of 2.9 percent or more.
A contract with this escalator will show a lower payment in the beginning years for early savings but will almost always result in fewer savings over the life of the contract.
We usually recommend against such payment escalators.
Sometimes, payment escalators are used as a sales ploy to show a much lower payment than other competing offers, with little or no mention of the payment amount rising every year. Be sure to read carefully, understand your goals (short or long term), and choose accordingly.
Solar loan = no, most but not all solar loans do not have a payment escalator. However, we have seen a few that do, so read carefully.
Solar PPA = yes, some but not all PPA’s DO have a payment escalator.
Solar lease = yes, some but not all contracts DO have a payment escalator.
Also, anecdotal reports from the real estate industry show that homes with solar leases or PPA’s that have payment escalators have proved to be the least desired solar financing instruments to take over by home buyers.
The payment escalator may make it a little more challenging to sell your home by reducing the pool of interested buyers.
Solar Energy Production Guarantees
The solar finance company will project an annual amount of electricity the solar power system is expected to produce based on several factors (panels, inverters, roof azimuths, etc.) and provide guaranteed and projected production schedules for each year of the entire contract.
Solar loan = no guarantees in most solar loans but you do have the solar panel and inverter manufacturer’s product, production and degradation warranties.
Solar PPA = there is a guaranteed kilowatt-hour (kWh) production schedule within the PPA contract and shown for each year and the entire term of the power purchase agreement.
Solar lease = there is a guaranteed kilowatt-hour (kWh) production schedule within the lease contract and shown for each year and the entire term of the solar lease.
Annual Energy Production True-Up
An annual “true-up” in a solar energy contract means that annual adjustments must be made to reflect whether or not the solar energy system produced more or less energy than was projected and guaranteed in the contract for that year.
The solar contract company will monitor the energy production of the system and can either issue a refund check or kWh credits for any annual energy shortfalls, or demand payment for extra energy delivered, or debits to guaranteed energy production in future years.
Solar loan = does not apply.
Solar PPA = most commonly, there is no annual true-up in a solar PPA whose payment fluctuates each month to reflect the actual energy produced in that period.
However, there does exist level-payment power purchase agreements, in which case true-ups or adjustments will usually apply.
Solar lease = yes, most leases have annual energy true-ups, though we’ve also seen them for three-year periods. The contract will state the terms of “true-ups” or “performance adjustments.”
Monitoring Energy Performance
Solar loan = ultimately you, the homeowner are responsible for monitoring the system. It’s pretty easy since most companies supply phone and cloud-based apps where you can tune in and see how your solar energy system is performing.
Most of the monitoring apps will send alerts.
Most systems include homeowner monitoring of the actual solar energy production, and in more and more cases, the household’s energy consumption is also being added, with side-by-side graphs.
Solar PPA = PPA company will monitor all energy produced by the system and will usually also provide the homeowner with access to an app that shows system production and perhaps even household consumption.
Solar lease = the lease company will monitor energy production and provide the homeowner with an app or cloud-based portal to also see energy performance, and perhaps even household consumption.
Warranties & Repairs
Solar loan = Most high-quality solar panels and micro-inverters come with 25-year product and power production warranties. Box inverters usually have 10-year product warranties.
The installation, wiring, and conduit are warrantied for at least ten years by the installing contractor as required by the state of California.
The solar monitoring device will have its own warranty. You’ll be responsible for replacing it after its warranty should it need repair or replacement.
10 to 25-year solar panel product & power warranties (we recommend those with 25/25).
10 to 25-year solar inverter product warranties (we recommend those with 20 to 25).
Ultimately the homeowner is responsible for managing the warranties and making claims if any are needed.
Hopefully, the company that installed their solar power system is still in business and can help them facilitate any warranty claims and repairs required.
Solar PPA = the PPA company is responsible for all maintenance and repairs of the system.
However, most PPA contracts reserve the right NOT to repair the system and can instead implement credits for any lost energy production at the end of the true-up period. Be sure to read the contract carefully as this could have very adverse effects of your electric costs.
For example, let’s say your PPA contract states that your cost for its solar energy is a fixed price of 15 cents per kilowatt-hour. Then we’ll project that two or more solar panels become faulty in seven years, and they do not produce energy.
If the solar PPA company chooses NOT to repair the system but to issue credits instead, per their contract rights, you will then be forced to buy that electricity from the electric utility company, usually at much higher rates.
Any credits received by the solar PPA company at 15 cents per kWh will not cover the full cost of the utility company electricity, and so your expenses have gone up in such a scenario.
It’s something to think about if you’re long-term planning.
Solar lease = usually the same terms as described above for a solar PPA.
Ability to purchase the system later
Solar loan = you own the system once the loan gets paid in full.
Most solar loans have no pre-payment penalty so you can pay off the amount due and own the solar power system free and clear at any time after it starts.
Solar PPA = most PPA’s include an option for the homeowner to purchase the system after a stated number of years (usually 7+ years for tax credit and depreciation reasons), or at the end of the contract term for either a stated price or an appraised value at the time of desired purchase.
Solar lease = most leases include the same option-to-buy as the PPA described above.
What happens when you sell your home?
Most solar finance contracts include an option to transfer the agreement to the new buyer of the property (on approved credit) or to purchase the system outright at a value to be appraised at that time.
Solar loan = must buy out and pay off the loan upon the sale of the home.
Solar PPA = usually includes both qualify to transfer and buy out options, but usually only after 7+ years due to tax credit and depreciation issues. See the contract for details.
Solar lease = usually includes both qualify to transfer and buy out options, but also usually only after 7+ years due to tax credit and depreciation issues. See the contract for details.
What happens when you refinance your home with a solar lease or PPA?
Solar loan = usually you must pay off the loan upon any home refinancing.
Solar PPA = contract places a lien against your property and files it with your County Recorder’s Office so you will need written clearance from the solar company to refinance your property loans.
Solar lease = also places a lien on your property, and the same process as described above for a PPA usually applies.
What credit rating is required?
Solar loan = solar loans vary in the credit rating required. Usually, a FICO score of greater than 640 is needed, but some lenders offer loans to lower scores.
Home equity loan = usually a FICO score of 640 or higher is required, but it varies widely. Contact your local credit union, bank, or lender.
Home equity loans are one of the best ways to finance a solar energy system is to take out a home equity loan or line of credit. These are typically there lowest cost loans available.
Solar loan on property taxes = most PACE loans only require home equity, no bankruptcy in the last two or three years, and no missed mortgage payments over the previous two or three years.
Solar PPA = credit ratings vary but common to see credit scores of 640 or higher needed to get approved for a solar PPA.
Solar lease = credit ratings vary but common to see credit scores of 640 or higher needed to get approved for a solar lease.
Credit qualifications vary significantly by the finance company, but the FICO scores required usually start from the low 600’s.
Federal Investment Tax Credit (ITC) for Income Taxes
In 2019 there is currently a 30 percent federal renewable energy income tax credit available if the system is installed and operating by December 31, 2019.
It’s exactly like getting a 30 percent rebate on your solar power system.
The IRS will send you a check or apply the credits to taxes owed, equal to 30 percent f the total costs of the solar energy system.
This tax credit includes repairs needed to the roof under the installed system.
The percentage of the tax credit will be reduced next year and afterward all the way to zero for homes and 10 percent for businesses, see the schedule:
30% in 2019
26% in 2020
22% in 2021
30% in 2019
26% in 2020
22% in 2021
Consult your tax advisor.
Solar loan = the homeowner receives all federal tax and state income tax credits.
Solar PPA = the PPA company will receive all federal and state income tax credits.
Solar lease = the leasing company will receive all federal and state income tax credits.
For more information, visit the Solar Energy Industries Association (SEIA) webpage on the Solar Investment Tax Credit.
Solar Renewable Energy Certificates (SRECs)
Solar loan = the homeowner receives all federal and state solar renewable energy certificates (SRECs are not currently available in California).
Solar PPA = the PPA company will receive all federal and state solar renewable energy certificates (SRECs are not currently available in California).
Solar lease = the leasing company will receive all federal and state solar renewable energy certificates (SRECs are not currently available in California).
For more information, see the Environmental Protection Agency (EPA) website on renewable energy certificates.
How To Select A Solar Installer
Now that you know everything you need to make an informed decision about how to finance your solar energy system, the next step is to interview solar companies. We’ve put together a 26 point checklist article on “How to Select a Solar Installer.”
What are the most important features and benefits YOU want from solar financing?
Comment in the box below.