Are solar leases or PPAs a good or bad idea?

Solar leases and PPAs are financing methods that let you get a solar system installed on your house for no money down. But are they a good idea?

Picture of money.

If you’ve ever heard of getting “free” solar panels, that’s usually referring to solar leases. With a no-money-down lease, a company installs solar panels on your house. There’s no loan principal to pay off either: you simply get to use the panels for 20 years or more in exchange for a small monthly cost.

Sound too good to be true? Often it is.

What are solar leases and power purchase agreements?

To learn more about solar leases, read our article on how to pay for solar panels.

But here’s the short version. With a solar lease and the closely related power purchase agreement (PPA), it’s like leasing a car. You don’t own a car you lease, and you don’t own leased solar panels either.

You’ll still get a utility bill, but the electricity usage on your bill will be lower because of the solar electricity the solar panels generate.

In exchange, you a separate bill from the solar company that is either a fixed monthly fee (as in the case of a lease) or a per-kilowatt hour charge in the case of a PPA.

Why would you chose a solar lease?

When you sign a contract for a solar lease or PPA, you don’t pay for the cost of the equipment - you’re pay to use them. In other words, it’s like a rental agreement. This can be appealing because the average upfront cost when you purchase a system is several thousand dollars.

Another advantage is that at the start of your lease or PPA, you should pay less for electricity than you did before.

One last possible advantage is that if you don’t have enough tax liability to take advantage of solar tax credits, such as the 26% federal tax credit, a solar lease or PPA might make financial sense for you.

I said that you should pay less for electricity with a lease deal, but that’s not always the case. In fact, due to escalator clauses in most contracts you might find yourself in a losing situation where you end up paying more for electricity than you did before!

This is one of the reasons why two state’s attorneys general have sued Vivint Solar, one of the largest companies in this market. More about that later.

Which companies offer solar leases and PPAs?

If you casually search the internet for solar installers, there are a few companies that come up almost no matter where in the US you live. These are the big national installers, and they take up a disproportionate share of the US home solar market: the top 10 companies handle more than 35% of home solar installations.

The remaining installation work is done by more than 5,000 smaller, local firms across the nation. That’s a hugely uneven market share. So why are the big 10 companies so popular?

Leases and PPAs are one of the big reasons. They market these no-money-down financing products as a win-win for the consumer: you can save the environment while saving money.

Top 10 largest solar installers in the United States

According to Wood Mackenzie, the top 10 largest solar installers in the United States by volume are:

  • Petersen-Dean (now bankrupt!)
  • PosiGen
  • Momentum Solar
  • SolarCity/Tesla
  • Sungevity (now bankrupt!)
  • SunPower
  • Sunrun
  • Titan Solar Power
  • Trinity Solar Power
  • Vivint Solar

Note that this report was from 2018, and includes a couple companies that are now bankrupt - a cautionary tale when it comes to these financing deals.

How can solar companies afford to install solar without collecting money upfront?

While solar equipment has gotten significantly cheaper over time, the cost of labor, hardware, and the overhead of running a business still means that the cost before rebates for a typical home solar system runs in the tens of thousands of dollars.

If the installer doesn’t collect any money from the customer upfront, it means they need to recover their investment over time. How do they do this?

There are a few ways. One very important thing is that the installer collects all the incentives, which can be significant. In 2021, this means at least 26% in federal tax rebates. Many states, utilities, and municipalities offer rebates too.

Instead of going to the homeowner like they would if they purchased the system, with a lease or PPA all these rebates go to the solar company. Use our calculator and you can see what the rebates in your area are.

Another key aspect is that companies that offer PPAs tend to be large, well-capitalized national companies such as Sunrun and Tesla. For example, Sunrun is a public company with an $11 billion market capitalization. This huge scale means they have the financial ability to afford tens or even hundreds of thousands home solar installations, and then wait while they earn a healthy financial return over time. The average homeowner can’t take on debt with the same bravado.

Finally, these companies are able to treat these solar systems as depreciating assets from an accounting perspective, which allows them to claim a tax benefit as the value of their asset depreciates over time. This is a business tax credit that a homeowner is not able to claim on their personal taxes.

So what’s the problem with third-party ownership?

On the surface, third-party ownership seems fine. If you don’t have the cash or want to take out a loan to pay upfront for solar, why not go with a lease or PPA? Yes, you’ll probably get a lower financial rate of return - but you still get solar panels and help the environment. Sounds good, right?

It sounds good in theory, but in practice the contracts for solar leases and power purchase agreements can - and do - contain some nasty surprises that consumers often don’t know about until it’s too late.

The contracts for these leases and PPAs are always long, and can be difficult to deciper. Every company will have a different contract, so we won’t call out any company-specific language in this article, but below are some things that are known to be included in the contracts for some companies.

Escalator clauses mean your costs automatically go up

Your lease or PPA contract will probably have an escalator clause. This means that the price you pay will steadily increase over time. Even if your utility company holds their rate steady, your solar electricity bill will go up no matter what.

A common percentage these days is a 2.9% escalator. What does that mean? Let’s say that your PPA contract specifies you will pay 13 cents per kilowatt hour. If you sign a 20 year contract, a 2.9% escalator means that at the end of your contract, you will be paying 22 cents per kWh.

Compounding effect of a 2.9% escalator rate

YearPrice per kWh
Year 1$0.13
Year 2$0.13
Year 3$0.14
Year 4$0.14
Year 5$0.15
Year 6$0.15
Year 7$0.15
Year 8$0.16
Year 9$0.16
Year 10$0.17
Year 11$0.17
Year 12$0.18
Year 13$0.18
Year 14$0.19
Year 15$0.19
Year 16$0.20
Year 17$0.21
Year 18$0.21
Year 19$0.22
Year 20$0.22

That’s a big fixed increase, and it applies no matter what happens with the retail price of electricity charged by your utility company. This means that even if your non-solar neighbors pay a steady rate, you could end up paying more.

Of course, it could work in your favor: your utility company might increase their rates by more than 2.9% (or whatever your escalator is).

But if you own your system, there’s no escalator. By purchasing your systme, you are basically pre-paying for your electricity for the next 25 years or more - however long your system lasts. The main gotcha with owning your own system is paying to fix system failures, which are generally rare.

You will still get a bill from your utility company

The sales pitches of some of these companies can get sketchy, and they often emphasize “free” electricity.

It’s not really free, of course. In fact, if you go with a lease or PPA, you will get two monthly bills: one from the solar company, which charges you for the solar electricity generated, and your usual utility company bill. While your utility bill will be lower because your electricity usage is being offset by the solar panels, there are always fixed charges with your electric bill. You will continue to pay those, no matter how much solar power you generate. There may also be taxes that you continue to pay.

Get a copy of your current electric bill and read it closely to understand what those charges are.

You pay for the solar electricity generated, no matter what

With a PPA, you pay a fixed rate for solar electricity. But there’s a big difference between a solar PPA bill and the one from your utility company: you don’t pay the solar company for how much electricity you use, but how much you generate.

Let’s say that in one month your solar panels generate 500 kWh of electricity, but your house only uses 400 kWh. In the normal case, you’d get a bill for 400 kWh from your utility company.

Not so with a solar PPA. You get billed for the 500 kWh of electricity that the solar panels generated, even though your house used less than that.

The solar system will be grid-connected, and any solar electricity you don’t use will be sent into the grid. You will receive a credit for that electricity, but the size of that credit will depend on whether you have net metering or net billing. Because of this, any excess generation could be a financial liability for you.

A system should normally be sized to generate no more than 100% of your annual usage - and many utility companies place restrictions on this - but if you decide to do energy-saving measures such as installing a smart thermostat to make your air conditioning use more efficient, it won’t really benefit you when you have a PPA because your monthly solar bill reflects your generation, not your consumption.

You don’t get the tax rebates

It’s worth mentioning again that you don’t own the solar system when you use a lease or PPA. The solar company owns the system, and they will receive all of the tax credits and incentives. Depending on where you live, these credits can be substantial: more than 50% off the system costs, in some states.

Before you even think of using one of these financing programs, check to see what incentives are available in your area. You can use our solar cost calculator to quickly find out. In 2021, everyone in the US will have access to the 26% federal tax credit.

Installation work is often subcontracted

When you hire a local solar installer, a person jumps into a truck and drives to your house. If the drive is longer than about an hour or so, a lot of small installer companies will decline the job. Time is money, and the extra time just isn’t worth it to them.

It’s different when you hire a giant company like Sunrun, which at the moment covers 23 states. Sunrun doesn’t have field offices scattered 23 states, conveniently spaced two hours apart from each other. Instead, they often use local subcontractors to do their work. From their FAQ:

Depending on where you live, Sunrun or one of our certified installer partners will do the installation. We partner city-by-city with local installers.

Using subcontractors isn’t necessarily a bad thing. If you use a small, local solar installer, it’s not uncommon for them to subcontract specialized tradework, such as difficult roofing jobs.

But using subcontractors across the nation makes it difficult to maintain quality control. Plus, there’s another point: if Sunrun is calling up local solar installers to do the job, why wouldn’t you just work with that installer directly?

By the way, when you use The Solar Nerd to get quotes, we only refer you to local and regional-sized solar installers. Companies that size, being local to the community, rely much more on reputation and word-of-mouth for their business. This is one way that The Solar Nerd helps to ensure that you’re working with quality companies.

Watch out for deceptive sales practices

The states of New Jersey and New Mexico have sued Vivint Solar, one of the country’s largest marketers of solar leases and PPAs, of deceptive sales practices.

In the case of New Jersey, the allegations were serious:

Specifically, Vivint settled allegations of falsely representing electrical bill savings, obtaining customers’ credit reports without their knowledge or consent, forcing customers to sign deliberately confusing contracts that violated their legal rights as customers and performed shoddy, damaging installations.

While the New Jersey lawsuit was settled out of court, the state of New Mexico has an ongoing lawsuit that lists 17 different counts against Vivint, accusing them of sales tactics that exaggerate or lie about the products and services they sell, and generally having business practices that constitute fraud and rackeetering.

You can read the complaint in full if you like, but the most serious allegations include excessively high electricity rates, placing defacto liens on customers’ homes, and not giving customers a paper copy of their contract before pushing them to sign it.

Vivint Solar isn’t the only company accused of poor sales practices. Sunrun has faced lawsuits in the past, and you can also take a look at the Better Business Bureau to find reviews of Sunrun and other big national companies like Momentum Solar.

“Liens” on your home (UCC-1 filings)

When you get a solar lease or PPA, the solar company owns the solar equipment. Because of this, the company will usually place what is called a UCC-1 financing statement on the equipment, also known as a UCC-1 filing or UCC-1 fixture.

A UCC-1 is similar to a lien, but it’s not technically a lien on your home - just the solar equipment that the company owns. Even so, a UCC-1 can cause problems if you sell your home or get a home equity loan. This is because the UCC-1 may show up in title searches.

This is such a problem for consumers that it was mentioned in the New Mexico lawsuit against Vivint Solar:

Vivint utilizes UCC-1 Financing Statements for these filings, which falsely describe the consumer as a “Debtor.” As a result, reasonable consumers are led to believe that this erroneous UCC filing is in fact a lien on their home, and potential home buyers of those homes are misled about any encumbrances on the real property. Vivint’s fixture filings operate to encumber consumers’ homes, negatively impacting the value of their property and complicating real estate transactions. These filings are made despite Vivint’s contractual promise to consumers that it will not file property liens.

This is a fairly complicated topic, so we wrote a whole article about it.

Which things should you watch out for?

Not every large solar installer that sells solar leases and PPAs are guilty of these practices. Also, regulations vary from state-to-state, so even if a company is known for poor practices in one state, that doesn’t mean you would have the same experience.

The most important thing you can do is demand a paper copy of your contract, and read it carefully before you sign. Don’t let a salesperson rush you into a signature - sign only when you fully understand what you’re committing to. Remember: these contracts are usually 20 years or even more, so take the time to really know what’s in them.

If necessary, pay a lawyer to review and explain the contract to you. The relatively small legal fee is worth it if it saves you a big headache down the road.

States that allow solar PPAs and leases in 2021

A power purchase agreement or lease is known as third-party ownership, and it’s a financing model allowed in only about half the states in the US. This is a list of states that permit this in 2021:

  • Arizona
  • California
  • Colorado
  • Connecticut
  • District of Columbia
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Illinois
  • Indiana
  • Iowa
  • Maine
  • Maryland
  • Massachusetts
  • Nevada
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • North Carolina
  • Ohio
  • Oregon
  • Pennsylvania
  • Rhode Island
  • Tennessee
  • Texas
  • Utah
  • Vermont
  • Virginia

Some states do not allow third-party ownership because of regulatory obstacles preventing solar companies from selling electricity into the grid - the argument is that these companies have a widely distributed set of small solar power plants and are effectively acting as utilities. There may also be political opposition from entrenched interests who would prefer to not have distributed solar competing with existing power generation.

This is a volatile topic, so watch this blog for future updates.

Questions to ask with a lease or PPA

The SEIA provides a thorough list of items that should be disclosed in a solar lease contract. We recommend printing it out and discussing it with your installer. In addition, here are some key questions to be sure to ask:

  • What is the term of the agreement?
  • What fees or downpayments are due at signing?
  • Who receives the solar tax rebates for the system?
  • What happens if I need to repair my roof?
  • What happens if I sell my home? Is the agreement transferable?
  • Who is responsible for maintenance, repair, and monitoring?
  • What happens if the system generates less power than planned?
  • With a lease: How much does my lease payment increase over time?
  • With a PPA: How much does my per-kWh rate increase over time?
  • With a PPA: Is there a monthly fee? Does it increase over time?
  • Is there an option to end the contract early? Is there a termination fee?
  • Is there an option to purchase the system at the end of the term?

The reality of “free” solar panels

In almost all cases you are better off purchasing a solar system, even if that means taking the time to shop around for the best rate on a home equity loan or HELOC. You can read our guide to solar financing to help figure this out - it has a handy cash-versus-loan calculator.

The only time where it could make sense to go with a solar lease or PPA is if your credit isn’t great and you are unable to obtain favorable financing from your bank. In this situation, third-party ownership might be your best choice if you want to get solar panels on your home. If you do go this route, just be sure that you understand all of the potential pitfalls.

What are other ways that I should pay for solar panels for my home?

If you want to get solar panels for your house, you basically have three ways to pay for them:

  • Pay cash.
  • Take out a loan, then pay cash.
  • Get a solar lease or power purchase agreement.

The first two are pretty self-explanatory: the solar contractor installs solar panels on your roof or in your backyard, takes care of the permits, and connects your system to the grid. When they’re done, you pay the invoice.

If you don’t have the cash in your bank to cut a check, you can take out a loan. If you’re a homeowner, a home equity line of credit or a home equity loan are common ways to use the equity in your home to get a loan at a favorable rate. It’s generally much, much cheaper than carrying a balance on your credit card.

Whether you take out a loan or not, by purchasing your system you’ll almost always gain the highest financial benefit. One big reason is that, as the owner of the system, you keep any solar incentives. This includes at least the 26% federal tax credit, and many state and local rebates are also available across the country.

To help you figure all this out check out our article on paying for solar panels, which includes a simple cash purchase versus loan calculator.

Summary: solar leases and PPAs are a bad choice for most consumers

The bottom line is that if you want solar panels, you should either pay cash or take out a loan. If you can’t afford to do either, consider alternatives such as community solar. In fact, community solar has all the advantages of a solar lease without the downsides.

Here are the main reasons why a solar lease is a bad choice for most people:

Solar leases and PPAs usually have an escalator clause that raises the cost of your electricity by a fixed amount every year. You could end up paying more for electricity than if you didn’t go solar at all.

Solar companies that emphasize leases/PPAs often use sales tactics that are pushy or even illegal. Some companies have been known to prey on senior citizens.

The big national companies that push leases/PPAs often rely on subcontractors to do the installation work. This can make it hard for companies to provide consistent quality across their service areas.

Selling a house with a leased/PPA solar system can be difficult.

#Finances #Leases and PPAs

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