A Power Purchase Agreement (PPA) provides a method for financing a home solar system where a homeowner enters into a contract with a solar provider. The provider installs the solar system on the homeowner's rooftop with minimal or no upfront cost. In exchange, the homeowner agrees to purchase the solar energy produced by the system for their home's electricity needs.

The energy rates are typically lower than those charged by traditional utilities, allowing homeowners to save on their energy bills. However, the homeowner may still receive and pay a utility bill for any additional electricity consumed that the solar system cannot generate, such as during nighttime or periods of high energy use.

The Expenses Involved in a PPA

A primary advantage of PPAs is that they allow homeowners to access clean energy with minimal upfront costs and without the need to own the energy system. It's important to understand the different types of PPAs available.

When entering a PPA with a trusted solar provider, the provider should transparently disclose the price per kilowatt-hour (kWh) and any potential increases or "escalators" that might occur over time.

Keep in mind that many companies offer initially appealing low rates, such as $0.155 per kWh, with no down payment for those who qualify. However, these contracts often come with an annual rate increase, typically between 1-2.9% per year, for the entire duration of the PPA (which may last from five to 25 years). Though these rate increases might seem minor, they can amount to significant additional costs compared to a flat-rate PPA over the course of the agreement.

Disadvantages of a Power Purchase Agreement (PPA)

While a Power Purchase Agreement (PPA) can initially lead to lower energy bills, this benefit may not last throughout the duration of the agreement. With a PPA featuring an escalator clause, the cost of electricity can increase over time, potentially leading to a situation where the homeowner is locked into a 20-25 year agreement with rates that exceed those of the utility provider towards the end of the term.

Some solar installers prefer PPAs because they can claim the 30% federal tax credit on the project and receive monthly payments for work that only takes a day to install. Exercise caution with installers who lead their solar pitch with a PPA; these installers may not have the homeowner’s best interest in mind, as they stand to benefit more from a PPA than from a homeowner purchasing their solar system outright.

Advantages of a Power Purchase Agreement (PPA)

Power purchase agreements (PPAs) can be advantageous for homeowners who anticipate a shorter residency but still want access to lower electricity rates. The minimal initial investment required for a PPA is a key selling point. Additionally, for homeowners who prefer not to manage the ownership or maintenance of equipment, a PPA provides peace of mind and convenience.

Key Takeaway

Solar PPAs provide a pathway to accessing clean electricity and reducing energy expenses. While they can offer immediate financial benefits, they often yield lower long-term savings compared to owning a solar system outright. Additionally, these agreements can introduce complexities when selling a home.