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Solar System Purchase vs. Power Purchase Agreement

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residential grid pv Solar System Purchase vs. Power Purchase Agreement

Long before there were any federal or state funds to help offset the initial investment of a residential solar system, installations were on the rise.  Solar adoption has increased significantly since the inception of the federal solar tax incentive in 2006, which rebates 30% of the purchase price of the system.  In 2007, the California Solar Initiative was implemented to offset all or part of the cost of installation in proportion to the system’s actual or projected performance.  With all of this support from the government, it’s no wonder that more people have gone solar in the last two years than the last twenty years combined!  A portion of these new systems were not purchased by homeowners however.

Companies like Sun Run and Solar City offer the benefits of solar without the upfront cost of the system through the contracted sale of solar electricity in what is known as a solar power purchase agreement, or solar PPA.  A solar PPA brings a mini-power plant right to a home-owner’s roof, so there is no additional charge for delivery, which usually accounts for as much as 40% of an average electricity bill.  No delivery charges plus savings from federal and state rebates drive the cost down, making solar electricity rates cheaper than the majority of grid rates.  For more information on these agreements and how they work, see this informative article about SPPAs .
Up until recently, homeowners have had no choice when it comes to buying power.   Customers sign up for an indefinite PPA with their local utility when they move in to a new residence and watch their electricity bills increase every year.  Now homeowners have the option to buy their own power plant and create electricity on-site or defer the ownership of the same system to a solar services provider, in which case they tack on another utility bill but potentially protect themselves from electricity rate hikes.
So which option will work best for you?  That depends on several factors, including your own values in regards to ownership.  Put simply, for those who don’t have the up-front capital to invest in their own system, the SPPA may make more sense as long as the combination of their post-solar utility bill and the solar bill is less than what they were paying on the pre-solar utility bill.   If ownership is important to you, but funds are still a factor, there are financing options available which will result in a monthly payment towards the purchase of the system.   This purchase option ends up looking very similar to a system lease, except that you (not a third party) are responsible for the system. This will be discussed in a subsequent article.
Either scenario involves a level of risk.  With an SPPA, homeowners are crossing their fingers that utility rates will rise as projected by their solar services provider.  If they don’t, the savings from the SPPA (which are projected to to save more than a purchase option up until around the fifteenth year of service) may not add up to the attractive speculative savings that originally caused the homeowner to sign up for the twenty-year agreement.  In addition, there is a very real possibility that in the next two decades the solar services provider that owns the system may go out of business or be bought by a larger company, which could result in changes to the solar power purchase agreement.
In a purchase option, the limiting factor is the electrical production of the panels themselves.  If the panels under-produce for whatever reason, the homeowner’s savings will be proportionally less, thus decreasing the return on investment and increasing the amount of time it takes to recoup the cost of the system.  Also, the maintenance of the system is the responsibility of the owner.  Maintenance can incur additional costs when replacing, repairing, or cleaning panels, which is why it is crucial to assess those potential costs in the grand scheme of your investment in solar.

At the end of the day, buying solar is a great option because as soon as the initial investment has been recovered, homeowners have little to no electricity bills and receive their renewable, clean power on-site, virtually for free.  The SPPA offers cheaper rates compared to grid electricity, little to no upfront cost, and provides a familiar utility-customer relationship.  The “power plant” isn’t owned or maintained by the customer; they just pay a bill.  Both scenarios are long term commitments, and there are advantages to both options.  These advantages will be specific to the homeowners and their usage, location, and financial situation.

The best advice is to weigh the ups and downs of both choices as they apply to your specific means and needs to determine which is right for your home.  As always, seeking professional advice will aid in your deliberations.  Value-added solar retailers, such as gogreensolar.com, not only provide everything needed for the installation and operation of a solar system, but they have staff on-hand ready to assess your specific needs to tailor a solar solution to your home.

Whatever your choice, there is no doubt that solar electricity is the wave of the future.  So… how will you choose to ride it?

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