What’s the Difference Between a Solar Lease and a Solar Power Purchase Agreement?
For those of you who are comparing different options for going solar, your main choices are purchasing a system as an addition to your home, buying a new or upgraded home with solar already integrated as a feature, buying your electricity utility-style through a solar power purchase agreement (SPPA), or signing up for a solar lease. The latter two choices are very similar and require a closer look to distinguish one from the other. (For a comparison between purchase options and SPPAs check out this article.)
Sleek solar tiles from Applied Solar.
To start off, it’s important to cover the basics of how both financing models work. The SPPA option has been described in detail in this article, but for now it’s best just to cover the practical details of how these agreements function:
SPPA stands for “Solar Power Purchase Agreement.”
The SPPA provides the benefits of solar with little to no upfront cost (usually between 0-$2000).
The agreement is usually termed for 15-20 years, and is transferable to another owner or home.
A solar services provider charges a set rate per kilowatt-hour.
The electrical rate can remain flat, but is more commonly contracted with a fixed annual increase of around 3%.
The solar utility maintains, monitors, and insures the system over the term of the agreement.
The solar utility that purchased the panels benefits from the Federal Investment Tax Credit (ITC) and any Renewable Energy Credits (RECs) that are generated.
The installer (sometimes separate from the solar services provider) receives any available money from state rebates (which means the homeowner didn’t have to pay part or all of the cost of installation).
Most SPPAs have options to buy the system throughout the term of the agreement or to pre-pay for all of the remaining electricity at a discounted rate while deferring the responsibilities of ownership to the solar utility.
The home is always tied to the grid, so any excess electricity used beyond what the panels produce is purchased from the grid utility.
Homeowners that want to pursue this option must be properly qualified with a minimum amount of monthly electricity usage, proper sun exposure and roof orientation as well as excellent credit (usually FICO 680 or better).
A handy illustration of how an SPPA integrates into the grid electricity system.
Next up, the solar lease has become a popular option because, like the SPPAs, homeowners don’t have to buy a system. They just make a monthly payment and receive the benefit of clean electricity. Here’s the skinny on leases:
There is commonly no upfront cost.
Leases are usually locked in for 15 years or more, and are transferable to another owner or home.
Unlike an SPPA, homeowners don’t pay for any electricity that the system generates.
Homeowners pay for a monthly lease, plus any extra kilowatt-hours that they need from their utility. The monthly payment covers all power produced by the panels. Most leases include an annual escalator that is typically less than the average rate increases from the grid utility, however some programs have no yearly increases.
Solar lease terms may include maintenance, monitoring, and insurance by the provider, but not always.
Like the SPPA, homeowner’s installation cost is offset by state rebates, and they don’t receive tax benefits or RECs.
As with the SPPA, there are options to buy the system throughout the lease term or at the end of the lease for a set residual price. In both options it’s best to negotiate the Fair Market Value (FMV) at the end of the lease or at whatever point a purchase is being discussed, because used panels aren’t worth much more than the cost of taking them off of the roof.
The home is always tied to the grid, so any residual electricity needs are covered by the grid utility.
This option commonly requires good to excellent credit, which differs from program to program.
So when we get down to brass tacks:
The SPPA option sells power generated by solar panels with little or no money down and a flat or annual increase on the rate per kilowatt-hour.
The solar lease option typically offers no upfront cost, and homeowners pay a flat leasing fee, which usually increases every year by a pre-determined percentage, plus the residual utility bill.
Both options are good for homeowners searching for low to no cost financing. In the long term, however, using a home equity loan or an energy efficiency mortgage to buy the panels may make more financial sense. In addition to these financing options, there are also many cities that will finance a solar upgrade through a tax assessment known as Property Assessed Clean Energy (PACE) Financing.It’s always a good idea to weigh every option. There are many companies that offer SPPAs, leases or both, so it’s important to closely compare the fine details of each. Be sure to ask about buy out options, annual escalators, minimum qualifications and terms of maintenance. For information and a quote on a solar lease, call GoGreenSolar.com at (866)-798-4435.