Decades of slowly rising energy costs have led many American homeowners to search for grid electricity alternatives, and the evolving residential solar industry offers opportunities for emission-free savings.
If purchasing or financing a solar energy system isn't the best option for your particular circumstances, both power purchase agreements and solar leases can deliver immediate and long-term financial benefits with third-party system ownership.
When evaluating the choice between a solar lease or PPA, understanding the agreements' similarities and differences is essential to ensure your contract is the best possible plan to reduce your home's ongoing energy costs.
In this complete guide, we break down all the definitions and decision-making factors you should know when considering a solar power purchase agreement or lease to reduce your energy costs and carbon footprint at home.
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Understanding Solar Leases
A solar lease allows you to utilize the solar energy potential of your home without purchasing solar panels outright. Much like in the lease of a rental property or personal vehicle, the solar company or third party that installs your panels will maintain ownership of the system while you pay a fixed monthly fee. In return, all the solar energy produced by your panels can be used in your home or credited to your monthly utility bills for immediate and long-term savings.
How Solar Leases Work
Solar leases are structured to deliver energy bill savings that exceed the cost of ongoing lease payments. As high-quality solar panels can generate power for two decades and more, a typical lease agreement is 25 years.
Solar leases typically include an annual escalator, which increases monthly payments by a fixed percentage each year. Throughout the operating lifetime of a solar lease, the system’s owner, not you, typically maintains responsibility for any upkeep or required maintenance and the system's eventual decommissioning.
Benefits of a solar lease include
- Immediate savings on electricity bills, with locked-in predictable monthly payments
- No large purchase required, avoiding interest paid on solar loans
- Ongoing monitoring and maintenance included within the agreement
Drawbacks of solar leases
- Lease transfer may be necessary when selling your home
- Lower lifetime savings versus solar panel ownership, especially if you qualify for tax credits
- Long contract terms with slowly escalating monthly payments
Understanding Solar Power Purchase Agreements (PPAs)
Like a lease, a solar power purchase agreement enables energy savings without requiring system ownership. While monthly lease payments are fixed, in a PPA, you pay for the amount of solar energy produced.
How Solar PPAs Work
In a power purchase agreement, your monthly payment will reflect the kilowatt-hours (kWh) of solar energy your panels produce. The electricity rates you pay for the solar energy from your roof are designed to be lower than what you’d pay for the electricity from your utility that it offsets. Like solar lease agreements, most PPAs are a 10 to 25-year commitment, and you should carefully weigh the pros and cons before proceeding with any project.
Benefits of solar PPAs
- Easy access to renewable projects at home
- Locked-in rates at prices lower than grid electricity for ongoing cost savings
- Only paying for solar energy produced, rather than a fixed price for the system each month
Drawbacks of solar PPAs
- Fluctuating payments, which usually include an annual price escalator
- Less ability to benefit from excess solar production than with a lease or purchase
- Added considerations during home sales and system transfers
Comparing Solar Power Purchase Agreements and Leases
Both leases and solar PPAs can be worthwhile renewable energy projects for homeowners looking to save money on immediate and long-term electricity costs.
Practically, these options are best for those who do not want to invest in solar ownership, cannot take advantage of the federal solar tax incentive, or seek a worry-free option with maintenance and care included.
Head-to-head, here is how a power purchase agreement and a solar lease stack up against one another financially.
Upfront costs: None likely for either contract
Most solar PPAs and leases are signed with zero upfront costs, meaning that the solar company will design and install your system without any out-of-pocket expenses.
In rare cases, you may be able to make a down payment on your solar lease or power purchase agreement to lock in even lower prices throughout your contract.
Ongoing expenses: Flat vs. variable payments
The key difference between a solar lease and a PPA is how your ongoing energy expenses will be calculated. With a lease, you pay a flat monthly rate for all of the power your panels produce, whereas with a PPA you pay for the exact quantity of solar electricity generated.
In both scenarios, you will likely pay slightly more for your solar power each consecutive year, with a fixed percentage increase every 12 months. This escalator is designed to remain below utility prices for the duration of your agreement, as illustrated in the chart from the National Renewable Energy Laboratory below.
Ongoing maintenance: Included in the best agreements
Although solar systems require very little ongoing maintenance, small bits of upkeep may pop up during the 20 years or more of a PPA or lease agreement. In both agreements, the solar company or a third-party developer will typically monitor your system's performance remotely and take action to remedy any damages, malfunctions, or losses in power.
Before signing your PPA or lease, it is essential to fully understand what will be covered when things go wrong. In the best-case scenario, your PPA or lease agreement will include every part replacement or labor required without any future out-of-pocket costs.
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End of agreement processes: Varies by provider
Solar leases and PPAs have similar end-of-agreement processes, though terms and options vary by project owner. In some instances, you may be able to extend the terms of your agreement, buy the system outright, or simply let the contract run its course. At the end of most PPAs and leases, the developer will be on the hook to remove the system from your property without additional fees.
Property value and property taxes: Unchanged in both
Unlike when you buy a solar energy system, panels installed using a lease or PPA are less likely to increase your property value. While a purchased system would be considered an asset, panels associated with ongoing payments may not increase the value of your home for a sale or property tax assessment. The added value of a solar energy system is exempt from property taxes in 36 states.
Note: This content is for educational purposes only. Palmetto does not provide tax, legal, or accounting advice. Please consult your own tax, legal, and accounting advisors.
Performance guarantees: Varies by project owner
Premium PPAs and solar leases (like the Palmetto LightReach Energy Program) often include performance guarantees to ensure your system's electric output delivers as advertised. With such a guarantee, you can be credited or compensated directly for any reduced savings from underperforming panels or broken system components.
LightReach customers are automatically enrolled in Palmetto Protect, which guarantees system performance up to 90% of expected annual power generation.
Making the Right Choice for Your Home
If you have decided that third-party solar ownership is best for you, it’s wise to choose between a lease and PPA with the help of a solar professional.
However, before contacting any installers or project developers, take some time to better understand your home's energy habits, both now and in the future. The two most important things to grasp are how much you pay for grid-supplied electric power and whether or not your home's energy profile may transform sometime soon.
While electricity consumption is always variable, home additions, appliance upgrades, EV purchases, and changes in the number of residents can significantly swing energy use up or down.
Finding what programs are available in your area
Cost-saving solar PPAs and leases are not universally available in the US, but they’re rapidly growing in popularity throughout solar-forward states with high retail energy prices like Hawaii, Massachusetts, and California.
What to ask your future solar provider
Solar leases or PPAs are long term agreements, and you want to understand the details and how your installer will handle them before entering into either. To help you make the best decision for your home, here are about a dozen questions you can ask potential lessors or PPA project owners to guarantee your solar array is the real deal.
For a solar lease
- What is the duration of the solar lease? Are there multiple options?
- How much will my lease payments cost, and is there an annual price escalator?
- What happens at the end of the solar lease?
For a solar power purchase agreement
- What will I pay for the electricity my solar panels generate, and will that rate change?
- Will the panels be installed on my property or off-site, as in a virtual or synthetic PPA?
- Can I buy out my solar panels during or at the end of my contract?
For Both
- What is the project timeline? When will the panels be installed?
- Are there any upfront or hidden costs I should be worried about?
- What happens if my panels stop working or don't work as expected?
- If I need to relocate, can I terminate or transfer the agreement?
- How will the solar installation affect my home insurance policy?
Conclusion: Weighing Your Renewable Energy Options
Ultimately, solar leases and solar PPAs are designed to do the same thing: save you money with renewable energy at home.
While the contract structures vary slightly, neither is inherently better or worse than the other. Maximizing your savings will depend on your ongoing energy costs, your home's solar potential, and what programs are available in your area.
Before signing a 10- to 25-year agreement, it is important to fully understand how your solar PPA or lease is going to work, including its future financial implications. Choosing the right solar company is key to maximizing your immediate and ongoing electricity savings with a PPA or lease.
To explore options tailored to your energy needs, consult with a Palmetto solar energy expert today. Our advisors are here to help you explore all of your financing options and answer every question along the way.
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Brian ChurchWriterBrian is a writer, NABCEP PV associate and outdoor enthusiast living in Denver, Colorado. As a freelancer, Brian has written hundreds of articles to help individuals, businesses and our planet benefit from solar power and sustainable energy systems.
