Why You Can Trust CNET Solar Power Purchase Agreements Explained: The Pros and Cons
Solar PPAs allow you to join the clean energy movement without the upfront costs of owning a solar installation. But there are disadvantages, too.
Learn more about solar power purchase agreements.
The cost of solar panels has decreased a lot over the years. But it's still pricey and unattainable for many.
Powering your home with solar energy is likely to save you a lot of money over the long run, but to get there, you'll have to invest somewhere between $10,000 to $30,000 (upfront or through monthly financing). One way around this large financial hurdle is through a solar power purchase agreement (PPA).
"Rather than an individual paying for the solar system either out of pocket or through some kind of loan, with a PPA, a third party will own this system and sell that electricity back to the site host at a fixed cost," Ben Delman, communications director at Solar United Neighbors, explained. "Ideally, that will be less than what they're paying their current utility provider for electricity. In that way, they're able to pay no money down and see instant savings."
Sounds like a good deal, right? It certainly can be, but PPAs come with some drawbacks and a large hurdle: they're not available in every state. According to Solar United Neighbors, PPAs are currently allowed in 28 states and Washington, D.C., and are restricted in seven states including sunny Florida.
But if you live in one of those states where PPAs are offered, it could be a good way to start soaking up the sun's energy and save on your electricity bills.
What is a solar power purchase agreement or PPA?
When you purchase a solar power system, you pay a company for the materials (photovoltaic cells, racks, inverters and other parts) and the installation on your roof that's needed to collect energy from the sun. You will own the system that is now part of your home.
Under a PPA, the installer will retain ownership of the solar system, then charge you a fixed rate for the electricity it produces. The PPA provider will bill you every month for the energy you use, much like your electricity utility does. There may be occasions where you have to pay both the PPA provider and your energy utility, but your overall energy costs should be much lower -- average PPA costs per kilowatt are about a third of that of traditional energy. One thing to look for in a PPA contract: Many include so-called "escalators," which raise the rate you pay for electricity at certain intervals within the contract.
How do solar PPAs work?
"PPAs provide a long-term contract between a property owner and energy developer that installs, owns and maintains a solar array on a property owner's land," said Kelly Stevens, assistant professor at the School of Public Administration at the University of Central Florida.
"The energy developer sells the electricity generated by the solar array back to the property owner, thus setting a long-term, fixed-rate for electricity and financing the up-front costs to install a solar array. In exchange, the energy developer qualifies for the Investment Tax Credit (ITC), lowering their overall capital costs to install the photovoltaic system."
The pros and cons of solar PPAs
Getting a solar power purchase agreement has its advantages for the average homeowner who wants to go green but might not be able to foot the bill for the up-front expenses or simply doesn't have the bandwidth to make the shift on their own.
The primary benefit of this arrangement is getting cheaper and cleaner energy without the hassle and cost of a traditional setup. Because the developer is in charge of the actual installation, all the homeowner has to do once reaching the agreement is allow the system to be installed and start paying for the electric bill once it is ready to go. You will typically notice a steep decrease in your monthly energy bill because you are getting your electricity from those solar panels and paying a fixed price that you and the developer agreed upon.
On top of that initial installation process, maintenance and long-term upkeep also fall under the purview of the developer. If your panels need replacing or fixing, the developer is tasked with making that happen. That takes a significant amount of financial risk off your hands. Again, all you will pay for is the monthly electricity bill.
There are trade-offs when you decide to enter a solar power purchase agreement, though. For one, you don't own the solar panel system, so you do have less control over it. While you don't have to go through the process of picking the panels or fixing them if they suffer any setbacks, you also won't have as much say over the system that powers your home and won't be fully energy independent, as you're still relying on the developer as your provider. You also won't get the benefit of tax incentives for making the switch to clean energy since you don't own the system. The developer gets the tax benefits and can sell excess energy generated by the system for a profit, which you won't be able to benefit from.
You'll also have to keep an eye on your property taxes with a solar system. It will increase the value of your property, which can result in higher property taxes that you will have to pay annually. Some states, however, will exempt you from this type of increase for a green upgrade.
One last thing to take into account is the length of your agreement with the developer. Solar power purchase agreements aren't short-term deals. You'll be locked in for 10 to 25 years or longer. If you need to get out of the agreement before then, you may face early termination fees, so make sure to read the fine print first.
If solar PPAs sounds appealing and are available where you live, here is a breakdown of the pros and cons:
Pros
No upfront costs: A PPA is one of the most affordable options for going solar. After you agree to a provider's price and terms and sign the contract, it will install the system on your home and you can start to realize savings on your energy bill.
Less responsibility: Since you've contracted with a PPA provider, all of the responsibility for the system's maintenance and tax implications are its responsibility, not yours.
It's cleaner energy: Many energy utilities across the country generate their electricity through sources such as natural gas or coal. Getting clean energy through a PPA cuts down on your personal contribution to climate change.
Cons
PPAs may not make sense for you: Even if you live in a state that allows PPAs, you may not save much money on your energy bills due to how much sunlight you get on your property or more aggressive price escalators. Buying a system outright may provide a better return on investment over the long run.
You won't own the solar system: Under a PPA, you are strictly paying a provider for the energy you use. Therefore, you won't get the ancillary benefits of owning a solar system, such as the ability to get tax rebates or sell renewable energy credits to your utility.
It can complicate selling your home: Owning a solar system has been found to boost the value of the home, which may not be the case with a PPA. Transferring a PPA to a new owner may be possible, but it could be complicated.
Long term agreements: If you don't read the fine print, you may find yourself with early termination fees if you break the agreement early.
Can you save with solar PPAs?
"Absolutely," Delman said. "PPAs are designed to save you money, ideally as soon as the PPA is signed and the system goes online."
As mentioned above, energy rates through PPAs are about a third of that of traditional energy, so you can expect to realize immediate savings with a PPA. Of course, be cognizant of any escalators in the PPA contract to make sure you're getting a good deal.
Is a solar power purchase agreement right for you?
For many people, a solar power purchase agreement is a solid deal. A PPA is a good way for homeowners without the financial means to outright purchase a solar system to still enjoy savings on their monthly energy bill. It saves on the steep upfront costs and time-consuming nature of installing solar panels while providing a quick and affordable path to going green.
However, for those looking to maximize their solar energy by capitalizing on tax incentives, energy credits and other benefits, purchasing a solar system outright is a better option. If you can make financing a solar system work, experts say the investment will eventually pay for itself after about six to 12 years, while boosting the value of your home.
Essentially, if you can afford investing directly in a solar system, it's worth it. But if the only way for you to go solar is through a PPA, you'll still get solar power's key benefit: immediate savings on your energy bills.
