By Judhajit Chakraborty, Assoc. AIA
Last month I was working on a project where we designed a renewable energy system for a client and upon the client’s request, we looked into various financing options of those renewable energy systems. This included state and local utility incentives, solar loans, and solar PV leases, which are also known as Power Purchase Agreements (PPA’s).
This article looks into various myths and misunderstandings regarding PPA’s. Though they claim to have zero down payments and cover all maintenance costs over the lease period, there are many hindrances and disadvantages of which consumers should be aware before embarking towards the PPA route.
1: With a solar lease, one might think of it as affordable solar energy with zero down payments.
However, upon calculating the payments on that zero down solar lease or PPA one will find the payments over the 20-year lease period (which is the general duration of a PPA lease) will triple the cost for a solar system when compared to purchasing a system.
2: Selling a home with a solar lease or PPA—the lease can be easily transferred to your home buyers.
However, It has been reported recently by homeowners and even real estate brokers that it has been more difficult to sell homes with a solar lease or PPA attached to it. It is a very complicated process which is being made even more complex by the agreement clauses and language. Be sure to consult with experts before signing the agreement.
Also, home buyers must qualify to assume lease with an excellent credit rating generally more than 700, otherwise in order to sell the home, the lease has to be paid off and/or disclose the solar lease obligation when selling the home.
Consider if a seller has 12 years of remaining lease payments on a 20-year lease on an outdated 8-year old solar system—what home buyer would want to be burdened with this when they could buy a brand new solar system for tens of thousands less? Of course, that would be a hard sell. And that would affect the home sale considerably. Many home buyers who thought of a PPA as a viable option to increase their home’s value during the recession are victims of this 20-year term.
3: A solar PPA lease is the only option for a zero-down payment solar installation plan.
Today there are many solar loans options available (5-20 yrs) which are “zero down.” For example, there is the FHA Title 1 Zero Down which is more convenient to get than a PPA agreement and one can keep the Federal Tax Incentive and all the advantages of applicable case rebates which cannot be attained with a PPA. Another example is the new PACE (Proper Assessed Clean Energy) programs that are cropping up all over the country that allow financing the PV system and its payback through property taxes.
What are the advantages of a PPA and which building types have the most advantage by going through the PPA lease? Certainly not residential. In my experience, I have found this type of leasing is ideal for:
1: State and Federal facilities which in most cases do not have the funding to outright buy and install a PV system but want to promote sustainability, renewable energy production in their facilities and without any headache for their maintenance as they are taken care of by the leasing company.
2: Commercial facilities for similar above-mentioned sustainability and maintenance reasons.
Solar PPA leases still dominates the PV market today, but their future looks bleak as both PV and its installation is becoming less expensive. PPA’s rose into prominence because maintenance was a hassle, but now that maintenance is much improved there are more attractive solar loans now through which one can own their own PV system, really adding value to their homes.