Solar Leasing versus Power Purchase Agreements: Which Is Better?

Purchasing rooftop solar panels for your home can save you impressive amounts of money on electricity. Since the average American home uses about 900 kilowatt-hours of power per month, a solar energy system with a generating capacity of 8 kilowatts would likely be enough to meet all of those needs, at zero extra cost as long as the panels continue to function [1]. At current market prices, an 8 kilowatts solar panel installation would cost about $17,000 (on average), including offsets from tax credits and rebates [2].

Such a system would likely pay for itself in energy savings long before it has outlived its usefulness (7-10 years is a normal payback time) [3]. But this still represents a significant financial investment that you may not be prepared to make, or may not be able to make.

Fortunately, you can still hop on board the solar energy train even if you aren’t willing or able to purchase rooftop panes upfront. Many solar contractors and installers will now allow you to rent their equipment for up to 25 years, at a set cost that can deliver notable energy savings in the long run.

If you’d like to rent, you have two options: solar leases and Power Purchase Agreements (PPAs), which are similar but do differ in certain details [4].

What is the difference between a solar lease and a Power Purchase Agreement?

This may sound too good to be true but it isn’t: for as little as zero dollars down, you can have a full-sized solar panel array installed on your rooftop and hooked up to your electrical system.

The companies that do this will retain ownership of the system, but you’ll be able to use as much of the power their panels produce for as long as they sit on your roof. They’ll handle maintenance and repairs, and you won’t have any extra or hidden charges beyond your monthly payments, which should cut your utility costs enough to save you a few hundred dollars a year on average [5].

If the system is large enough, it might be able to meet all of your power needs. But even if it isn’t you’ll remain tied into the grid, so you can purchase as much utility-generated electricity as you need to make up the difference.

In the 26 states that have legalized such arrangements [6], third-party ownership schemes come in two forms: solar leases and Power Purchase Agreements (PPAs). While the two are essentially the same, there are structural differences that can have practical consequences in some instances.

With a solar lease, you’ll be renting solar equipment with a pre-disclosed generating capacity. In return for the right to use all the power produced by this equipment, you’ll pay a monthly leasing fee that is cheaper than your previous monthly utility bills—which will now shrink to a pittance (20 percent of previous levels is about maximum). In general, these fees will rise 3-4 percent each year, but the average cost increase for utility-generated electricity runs higher than six percent per year in some locations [7].

Power Purchase Agreements (PPAs) preserve the third-party ownership model, and the installation process is the same. But instead of paying a set monthly fee for renting the equipment, you’ll only pay for the power you use at a specific per-kilowatt-hour price.

Your monthly fees will naturally vary under such an arrangement, which mimics the traditional power purchasing model. But regardless of how much or how little energy you use you’ll still be saving money, since your per-kWh fee for solar power will be lower than what you’d pay for utility-generated electricity. This fee may be flat or could rise by a pre-disclosed annual percentage, depending on the company you work with, but either way it will be set at a level that is likely to save you a fair amount of money.

Whether you choose a solar lease or a PPA, the term of your agreement will normally last for 20-25 years, and if you’d like to purchase those panels at a heavily depreciated price at the end of that term you’ll be able to do so.

Problems with leasing solar panels

Leased solar panels are money-savers, but when you lease instead of buying you won’t be eligible for the 30 percent federal tax credit for renewable energy installation (available until 2020) [8], state or manufacturer rebates (which are plentiful) or special energy credits that can be sold to utility companies for a profit. Because of these factors, your total savings on energy over the duration of a 20-year lease will be only about one-third as great as your savings if you chose to purchase your equipment ($5,000 versus $15,000 on average) [9].

Should you decide to sell your home, you will be able to transfer the rights to your solar panels to the new buyer, if he or she is interested. But if they are not interested, you may have no choice but to purchase your solar panels and pay to have them removed from the home, which can create extra headaches and reduce your profits on the sale by a few thousand dollars.

Another issue is with the annual increase in fees. If, for some reason, utility power rates don’t rise as much as expected, your energy savings may rapidly deteriorate as your lease ages. This may or may not happen (and if energy prices rise faster than expected your savings can be greater), but there is an element of gambling in solar leases that shouldn’t be avoided.

Problems with Power Purchase Agreements

The issues faced by people who sign PPAs are identical to those encountered by people who’ve leased their panels. With either arrangement, savings are less than they would be if you purchased panels and you could run into complications if you decide to sell your home (as many homeowners will before a 20-25-year lease expires). In either case you won’t own your panels, and that limits your rights and potential for financial gain.

Another potential issue is the honesty and integrity of the solar company you choose to contract. Some solar leasing and PPA companies are notoriously slow to answer customer queries or respond to requests for assistance, and a few companies have been caught lying about or exaggerating the potential savings their customers can enjoy with a solar lease or PPA [10].

The best option for me: how to decide?

Solar leasing arrangements and PPAs are likely to deliver similar savings, except in one instance. If you know for certain that your electricity use will vary from month-to-month, possibly by a significant amount, a PPA is undoubtedly the better choice.

With a solar lease you won’t get a price break if you go on vacation for three months, take frequent out-of-town fishing or camping trips during the summer, or otherwise cut your energy use by 30 percent or more in any given month. PPAs are more flexible because you only pay for the power you use, and if you can find a PPA that offers a flat kWh rate for the term of your agreement that can be even better.

Another consideration is upfront paying options. If you prepay a certain percentage of your expected costs for either a solar lease or PPA, your monthly costs will be quite a bit less and your long-term savings will be greater (leasing companies offer more attractive packages to customers who are willing to invest upfront).

Getting in on the ground floor with solar

When you purchase solar panels, you’ll get your electricity for free (with low costs on maintenance and parts replacement) for 15-30 years, depending on how long your panels last.

This is certainly your best option if you can afford it, and more than half of all homeowners chose to purchase their rooftop solar energy systems in 2017 [11]. But despite the decline in popularity of solar leasing and PPAs, they still comprise more than 45 percent of the market and offer an excellent opportunity for interested parties to get in on the ground floor of the solar energy revolution.