Leasing and Power Purchase Options for Commercial Solar Electric
While many businesses have the means or desire to purchase a solar electric system and own it fully, it is not the only way go solar. Solar leasing and power purchase agreements (PPAs) are popular alternatives for Oregonians to go solar and save money at little cost.
What are the main differences between owning a system and go solar through a leasing/PPA program?
Own : You buy it, claim all the incentives and tax credits, and maintain it and keep it forever. Roughly half of owned systems are purchased outright with cash, and half are financed with loans. Many systems payback completely between 5-10 years. After that, you’re business benefits from free energy. As a long term investment, owning a system usually makes more financial sense than going solar through a solar lease or power purchase agreement, though all options should save your company money in the long run.
Lease or Power Purchase Agreement (PPA): A third party company owns and installs the system, and has an agreement with your business regarding the cost for purchasing the energy generated. The third party enjoys most of the incentives, tax credits, and cost depreciation for the system, while your business shows their support for clean and renewable solar energy. The company offering the lease or PPA buys the system and owns and maintains it, and claims most of the incentives. You pay the company to use the system, most often for 15-20 years.
Typical Lease Terms
- 15-20 Year Contract
- Equipment Lease or Power Purchase Agreement
- Buyout Option
Lease Payment Options
- $0 upfront + monthly payments
- Some combination of upfront payment and monthly payments
- 100% prepaid with no monthly payments
Monthly payments are like a loan, but different in 2 ways:
- You are paying for a service, so someone else is taking care of the system for you
- You are not paying off a loan, so you do not own the system at the end of the contract.
What is the difference between a solar lease and a PPA?
- Lease: Homeowner makes monthly payments based on the cost of the system. Those payments are offset by lower electricity payments.
- PPA: Homeowner does not purchase the system, but rather purchases the electricity produced by the system (presumably at a lower rate than offered by the local utility).
How do I decide if solar lease or PPA is right for me?
- Do I have cash or home equity? If not, then purchasing the system is not an option. Incentives are good now, and may not be for long, so consider a lease or PPA.
- How is my credit rating? You will need this for anything other than a cash purchase (a loan or a lease).
- Does a solar lease save me money? Does it decrease my overall bill so the lease payment plus my electric bill total is lower than what I paid without the solar installation? Is there a minimum production guarantee? If the cost of the lease plus electric bill is the same or higher than my current bill, am I willing to pay more to support the use of renewable energy?
- Do I want a long term contract? What does it mean to enter into a 20-year agreement? Are you comfortable with your options if you decide to sell or rent, need to replace your roof, add a second story or if the company doesn’t survive?
- Am I going to sell business building or property? Do you think you will be able to sell the new owner on assuming the lease, or will you need to purchase it? As more systems are installed, people will become more comfortable with solar and understand its value.
- Do I want to deal with maintenance? Do you want someone else to take care of everything and keep your system running?
- Am I able to claim tax credits? Most of the incentives are in the form of tax credits. If you don’t owe enough in taxes to use the credits, leasing is a good option.
Read the Contract
We cannot stress enough the importance of reading your contract thoroughly. Here are some things to look out for:
- Can the contract be amended? Make sure there is no provision in the contract that could allow your rates to be adjusted mid-term.
- Interest rate/lease length. What is the interest rate and length of the lease? Have you compared the terms with packages offered by other companies?
- Down payment. Will you have to make a down payment? Is there an option to make a larger down payment to reduce your monthly lease payments?
- Payment escalation rate. Be careful of locking yourself into a high escalation rate. Nationally, average annual electricity rate increases have been 2.5%.
- End of term provisions. What happens when the contract is up? Is buyout optional or mandatory? How is the buyout amount determined? Is there a renewal rate? If they remove the system, what are the guarantees that the roof will be adequately restored?
- Performance guarantee. What if the system underperforms? Who takes that risk? If there is a performance guarantee, what will you have to do to make sure you get the promised value?
- Insurance. Who is insuring your system, and against what is it insured? Who is responsible for repairs and replacements, and under what circumstances?
- Sale of property. If you sell your business or building, what happens to the system? In most cases, the contract transfers to the new owner. What if the new owner does not want to sign the contract, or does not pass the credit check? If there is a purchase option, how will the cost be determined? Is there a penalty for early removal?
- Roof repair. What happens when you need to replace the roof? Must you hire the same company to remove and replace the system? Do you contact the local installer or financing company? How much notice must you give?
- Your responsibilities. What are you responsible for doing to hold up your end of the contract and ensure that you get full value of the system? Must you maintain insurance? Report outages? Keep a live broadband internet connection? Notify the leasing company of planned changes?