Solar PPA – power purchase agreement
What is a solar purchase power agreement?
A solar PPA is a contract that permits a third-party company to install a solar energy system on your property and sells you the electricity it produces at a pre-determined price per kilowatt hour.
The third-party company pays all costs for purchasing, designing, permitting, installing, maintaining, and repairing the system and charges the customer only for the energy it produces at a price per kilowatt-hour (kWh) agreed upon by both parties in the power purchase agreement contract.
How does a PPA work?
When you enter a solar PPA, the installer will cover all the initial installation costs and take responsibility for all future maintenance and repairs needed to keep the system running smoothly.
You agree to pay them for the energy produced through your panels each month while they are responsible for everything else.
You will pay a stated price per kilowatt-hour of energy (kWh) for all the electricity produced by the system, but this is usually at a fixed rate.
Essentially, you will be buying most of your electricity from the solar panel system instead of your utility company.
And if done properly, the costs are typically much lower than your local utility company and should stay at the same rate for the entirety of the contract.
The developer will receive any tax credits or government incentives for the system’s installation.
Any electricity you use above what the system produces, you’ll still be buying from the utility company like you used to do.
These solar PPA contractual agreements can last from 10 up to 25 years, after which the customer usually has three options:
- can extend the agreement with new pricing
- have the system removed
- or buy the system from the developer
Is a Solar PPA worth it?
The answer to this question depends on your situation, goals, credit, and what you can afford.
If you want the electricity the system produces to be free and clear after the system is paid off, then a solar PPA is not for you.
If taking advantage of federal income tax credits and other incentives is important to you, a PPA may not be the right option for you either.
Those tax credits can be used as part of your initial investment in an outright purchase, but those incentives go to the developer in a PPA.
Is a Solar PPA a good idea?
A solar PPA is likely to save you money each month off your total electric bill.
The price you pay per kilowatt-hour can be locked in for the life of the contract, though there are also contracts which have annual price increases so beware and read your PPA contract carefully.
But the solar panel system will never be paid off and owned by you free and clear (though that is an option in most contracts), so you’ll always have a company to pay for your electricity.
It used to be that a solar PPA or lease was the only way for homeowners to get a solar energy system without paying cash for one.
But today, there are many zero-money-down solar loans that may enable you to purchase the same solar energy system for a payment less than your current electric bill and that you would own free and clear once the loan was paid off.
Another thing to consider about a solar PPA is how long of a commitment you are comfortable with, especially if you plan to move in the near future.
These PPA agreements can last up to 25 years, and while some companies can arrange to relocate the system to a new home, not all developers offer this.
Most, however, will allow you to transfer the contract to the new homeowner if you find an interested buyer (after they credit qualify).
Can you buy out a solar PPA?
This depends on the agreement the developer offers you.
Some contracts will include a buy-out option, but usually only after seven years because of tax credits and depreciation issues.
Some developers may have penalty fees for buying out the contract early, so be sure to familiarize yourself with these stipulations before signing.
The best way to find out is to contact the developer or installer you are interested in working with and ask them what buy-out options they offer and have them show you where it states that in the contract writing.
If you anticipate buying out your contract, consider entering shorter agreements or using a solar loan and purchase at the outset.
Most solar PPA contracts last from 10 to 25 years, but some can be as short as 5.
Since most solar PPA developers allow you to buy out your system at the end of the contract, a shorter commitment may allow you to purchase it while avoiding early buy-out penalty fees.
How do I get out of a PPA?
Solar PPAs are a contractual commitment, so you want to make sure you have a clear understanding of the agreement you are signing.
However, even if you are comfortable with a long-term contract, situations can sometimes change.
It is important to fully understand what exit options your developer allows if your circumstances change over the course of the commitment.
Like most legally binding contracts, there may be an early termination clause or a “break clause” in your agreement which will lay out what circumstance would call for an early termination.
Usually, leaving your contract early will result in early termination fees.
Again, you may be able to buy out your system after seven years, but this can also result in penalties if you are buying out early.
PPA contracts often include a clause that allows you to transfer the contract to a new owner if you sell your property, but this is wholly dependent on whether or not you can get your buyer to agree to this and they must credit qualify for the PPA.
The best ways to get out of a PPA are available to you after you have completed your contract.
If you do not want to extend your agreement when the contract is up, the developer will remove the system from your property.
You could also choose to purchase the system at the end of the contract without any extra penalties.
You would then be responsible for any future repairs or maintenance, but your system would then belong to you, and you would own all the energy it produces afterward.
What are the Pros and Cons of a Solar PPA?
Other financing options
While PPAs are great for a lot of homeowners, this kind of agreement is not your only option for an affordable solar panel installation.
You may decide that purchasing or financing your system is right for you. Click here to see our Complete Guide to Solar PPAs, Leases, and Purchase Options!