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Nitty Gritty Details

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....

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Solar Power Purchase Agreements

If you are looking for the benefits of solar electricity with little to no upfront cost, minimal risk, and no maintenance responsibilities, you may want to look into a Solar Power Purchase Agreement (SPPA).  The sections below begin with a short and simple summary under each heading, followed by a more in-depth explanation to aid in understanding this solar option. What is a normal Power Purchase Agreement (PPA)? A PPA is an agreement in which the customer agrees to buy electricity from a power source at a particular rate per kilowatt-hour (kWh). Everyone who buys electricity from a utility company such as PG&E or Southern California Edison enters into a PPA without much choice in the matter.  You agree to pay for the generation, transmission, and distribution of the electricity from their power plant in a tiered rate schedule per kWh for an indefinite amount of time.  Typically, these rates increase every year in proportion to the utility’s increasing costs. The Public Utilities Commission (PUC) sets a limit to how much profit these companies make every year, so their increasing costs are caused by anything from increasing salaries and pensions to making repairs caused by weather, accidents, or the aging infrastructure of the grid.  Whatever the cause of the increasing cost of electricity, homeowners have little choice but to continually pay more for what they use, or use less grid power.  The latter choice is where solar options (purchase, lease, or PPA) come in. What is a Solar Power Purchase Agreement (SPPA)? An SPPA is similar to a PPA, except that the source of power is located on the homeowner’s property, and the agreement often includes a contracted increase in rates as well as an amount of time the user agrees to purchase the power. An SPPA is an agreement in which a third-party owns, operates, and maintains the photovoltaic system, and a host customer agrees to have the system installed on their property. Homeowners simply purchase the electricity utility-style from the solar services provider for a predetermined period rather than purchasing the system itself.  This framework is referred to as the “solar services” model, and the developers who offer SPPAs are known as solar services providers.  There are several other players involved in this model. The utility company continues to provide part of the host customer’s electricity.  The equipment manufacturer provides the hardware for the system, which the installers implement and maintain.  Investors, such as US Bank, provide the capital for the equipment.  A seperate special purpose entity manages the solar electricity payments, tax benefits, depreciation, ownership and leasing between the solar services provider and investors. SPPAs enable...

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