Solar Lease, Buy, or PPA
The kind of contract (lease, buy, or PPA - Power Purchase Agreement) you sign for your solar system - the way you acquire it - can easily have the greatest effect on your costs and savings of any single solar decision.
For the example system (close to average for the SCE region), making the wrong decision here can cost you $30,000 or even more over twenty years. That's much more than you can save by getting the right system, with full tax benefits, and finance it in the most economical way. As with all legal and financial decisions, it is prudent to check with your attorney or CPA first, and not to rely on advice from Solar Consumer Advisor or anyone else.
The 3 Ways to Acquire Solar
There are three ways to acquire a solar, photo-voltaic (PV) system: purchase it from the vendor, lease it from the vendor or the vendor's affiliated leasing company, or sign a solar PPA (Power Purchase Agreement) to buy all the electricity produced by the PV system on your roof.
In the last 6 months of 2016, over 49% of new solar systems were purchased (with or without a loan). 35.66% were PPA and 13.77% were leased, with only .41% on prepaid leases.* This is about 5.5% more purchased and 5.3% fewer on PPA than in 2015, with the number of leases having dropped by almost 1%. The trend is toward purchases, partly because prices have fallen and partly because the public is learning that purchasing saves them more money.
There are seven main factors that determine which of these three ways will be best for you. You can get more information about them by clicking on their links:
The discussions that follow on how to decide between solar lease vs. buy vs. PPA will explain the pros and cons of each in terms of these seven factors.
First Solar-Shopping Steps
To see your potential savings, try the Solar Panel Cost & Savings Calculator. No personal information required. Immediate on-page results. The only solar calculator on the web that is accurate for SCE customers.
If the Calculator shows enough potential savings for you, you can get the best possible shopping guidance by downloading the free Solar Buying Guides.
If you have questions or would like personal help, I offer a free service by phone or email to all SCE customers interested in solar. I can help you figure out the optimal size system you need and steer you to the best brands and models of equipment for it. I can also answer your questions about leasing, purchasing, and PPAs.
Reasurrances: I'm not selling anything; no pressure. I don't reveal any contact information unless you specifically ask me to, and even then only to a single dealer.
For details about this service and notes about me in video or text, please visit
Buy Solar Panels
If you buy solar panels with cash or with a loan, you own the PV system outright. You are protected against utility rate increases, except for any electricity you buy from the utility to make up for a shortfall from your PV system. (This should be close to none if you size your system correctly.) In fact, the faster utility rates increase, the more you save. If Southern California Edison's (SCE) rates go up faster than a safe estimate of 3% per year, your savings over the years will only increase. (A 5% per year rate of increase saves an additional $10,000 for the example homeowners.)
The rate of inflation should not affect you much, unless you finance your purchase through a loan. In that case, inflation is your friend. You will repay the principal and interest of the loan with dollars worth less and less over the years, substantially increasing your net savings ($4,885 in 20 years for the example homeowners). For a full explanation of how this works in your favor, along with all financing options, please see Solar Financing Options.
Any solar rebates available (none for SCE at the moment) and the 30% Investment Tax Credit (ITC) go directly to you if you buy solar panels, reducing the net price of the system. If you finance, you can also deduct interest on the loan from federal and state income tax, saving $3,700 in the example, with a 20 year loan at 4.74% interest.
If you sell your home within about 15 years, its value is likely to rise by about your net cost for the system. Later, the extra value might decline to about half your net cost. If you don't sell it, you will continue to save on electricity up to 40 years or more with a top-quality system. This factor can make a large contribution to your overall savings. A full treatment of this important issue is at Solar Increases Home Value.
When you own the system, you are liable for all risks, except those covered by warranties and performance guarantees, on which you shouldn't rely too much, especially for purchased systems. The way to overcome this problem is to purchase wisely - a system unlikely under-perform or need repairs.
In sum, purchasing is an excellent way to acquire a PV system, as Green Energy Money explains. Consumers are shifting away from leasing and PPAs towards purchasing solar PV systems, as explained in Bloomberg, the Wall Street Journal, and The Motley Fool. You get the maximum benefits from factors 1 - 5, especially if you finance. The small drawbacks of purchasing in factors 6 and 7 (Risks and Repairs) are not important and can easily be overcome with a wise purchase. The Solar Panel Cost & Savings Calculator assumes a purchase and best financing, so you can use it to see your savings under these best-case assumptions.
Leasing solar panels breaks down into two distinct options: pre-paying the whole 20-year lease in full, whether with your own cash or with a loan, or making monthly lease payments to the solar vendor or their leasing affiliate. But when you read about solar leasing, they usually say leasing is a terrible idea. That is because they are overlooking pre-paid solar leases, which are a different kettle of fish. Although both are leases, the effects on your savings are very different. But to start, here's what pre-paid leases and monthly leases have in common:
But here's where pre-paid and monthly leases differ:
In sum, a pre-paid solar panel lease makes some sense, although it is not as attractive as purchasing. You get the same benefits from utility rate increases and inflation (especially if you finance), most of the ITC, tax-deductible interest if you finance, and all risks and repairs are the vendor's problem. If you sell your house, you're likely to get almost as much added value as if you purchased. Whether you keep the system past the 20-year point, or what an extended term might cost, is unknown. For a sample of leasing terms and conditions, see this FAQ.
However, monthly payments to lease solar panels from a solar vendor is one of the worst options. It cuts your overall savings down the most through higher payments, a significant escalator percentage, no tax deductions, and problems if you try to sell your home. In the example, it costs $23,000 more over 20 years than a moderate-interest-rate loan. Since solar vendors require about the same quality of credit for a monthly-payment lease as the most lenient loan providers, there's little reason to recommend it to anyone.
In both types of lease, you must read the lease agreement carefully, preferably with the advice of an attorney, because these leases often contain extremely unfair and onerous clauses you may come to regret agreeing to.
Solar PPA (Power Purchase Agreement)
When solar was more expensive, PPA solar was popular, but they're getting less so for good reason: they're not a bargain. Many vendors don't even offer them. Greenlancer.com has a short summary called "What is a Solar PPA and How Does it Work."
A solar PPA is similar to a monthly-payment solar lease, only worse. The solar vendor retains ownership of the PV system installed on your roof. But unlike solar leases, a solar PPA usually gives you neither knowledge nor control over what equipment is installed, who installs it, or the type of installation. You sign a 10 to 25 year (20 years is typical) contract to buy all the electricity produced by the system. You pay the solar company for this electricity by the kWh produced, whether you use it or not. You also pay your utility for any excess usage charges not completely offset by the electricity fed back to the grid by the PV system.
Monthly payments for PPA solar start at a fixed rate per kWh of system production, but they usually escalate each year like monthly lease payments and utility rates. 2.9% is a common escalator percentage, but it can be as high as 5%. This reduces or eliminates your benefits from utility rate increases and inflation. The vendor keeps all rebates and the 30% ITC. Risks and repairs are the responsibility of the vendor, but you have enforce their guarantees.
The big difference between a monthly solar lease and a solar PPA comes at the end of the term, usually 20 years. Unlike monthly leases, a PPA completely and definitively stops at the end of the term. The vendor has you over a barrel. Either you sign a new solar PPA to continue to receive the electricity from your rooftop PV system or the vendor can simply shut it off, without incurring the expense of removing it from your roof. Therefore, the effects on selling your house are worse than with monthly solar leases, because the buyer must now face this prospect.
PPA solar salespeople emphasize the benefits of paying a fixed rate (except for the escalator percentage) for your electricity. This is highly misleading. The monthly fee you pay for solar PPA is really just like a monthly lease payment, because how much electricity the system produces each year is pretty well known. It's true that you don't have to pay for electricity it doesn't generate if it under-produces, but you can be sure that is fully taken into account in the rate per kWh charged.
The monthly payments for PPA solar usually start somewhat less than for a monthly lease. This is not an accident. That is their main selling point. But this advantage is soon lost. Because monthly leases usually escalate by only 2% per year while PPA payments usually escalate by at least 2.9% per year (SolarCity for example), the PPA payments catch up to the lease payments well before the term is up.
With the $18,440 net example system, you'd pay about $3,250 extra for a solar PPA over 20 years, compared with the most expensive loan. In addition, since you have no control over the system installed, and since PPAs allow for much more degradation than a high-quality system (easily six times as much), your charges from SCE would increase every year as your system falls further and further short of your electricity needs. These additional costs would be around $8,500 over the 20 year term in the example. Add this to the $3,250 premium over the most expensive loan and a PPA ends up costing about $11,750 more than that loan. A truly bad deal.
As with leases, you must read the PPA agreement carefully, preferably with the advice of an attorney, because these contracts often contain extremely unfair and onerous clauses you may come to regret agreeing to.
Overall, it's hard to think of a situation where anyone would get more benefit from a PPA than some other form of ownership and payment.
Recommendations About Forms of Acquisition
Right now, with terms as they are, it seems clear that purchasing is the best option for most people, with pre-paid leases a somewhat close second. Monthly-paid leases and PPAs are much worse. This is why the Solar Panel Cost & Savings Calculator assumes that you will buy solar panels, rather than a solar lease or solar PPA.
* California Distributed Generation Statistics, Stats & Charts, based on Currently Interconnected Data Set updated through Dec. 31, 2016, for Solar only, SCE utility only, number of projects, residential only, set for either last 6 months or previous year (2015).