Solar Power Purchase Agreement Explained

What is a solar purchase power agreement?

Solar PPAs allow the solar developer to retain ownership of the solar system on your property and sell the generated electricity to you at a fixed rate, usually lower than the rate set by utilities. A solar power purchase agreement, also referred to as an SPPA or a PPA, is an alternative path to getting solar energy for your home.

When buying solar panels, you’re typically responsible for selecting the solar panel company and the solar equipment and organizing any associated documentation to get the federal tax incentives. A solar PPA can be an easier way to get solar energy without buying and maintaining a costly solar system. PPAs let you pass the heavy lifting to a developer while enjoying less expensive green electricity rates and using a renewable solar resource to offset pollution.

As part of a PPA, a solar developer will handle the details, such as:

• Design
• Permitting
• Financing
• Installation
• Maintenance
• Management

Imagine you have a car you can drive anywhere you want, but you never have to fill it with gas, wash it, or take it for oil changes. That’s essentially what a solar PPA can do for you, except the car is your residential solar energy.

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How to qualify for a solar PPA

To qualify for a PPA, a person must:

• Live in an area that allows PPAs. Use this map from the Database of State Incentives for Renewable Energy (DSIRE) to see where PPAs are allowed. PPAs are not allowed everywhere because “[s]ome state regulations limit or restrict non-utility providers in regulated markets from selling electric power,” according to the U.S. Department of Energy (DOE), 

• Pass a credit inquiry. Credit check types and credit thresholds vary by the solar installer. For example, according to Sunnova, “[c]ustomers who apply for a PPA, EZ-PPA or a lease energy plan, Sunnova will check your credit with a soft inquiry, and it will remain as a soft inquiry even if you decide to proceed with the agreement.”

Solar PPA vs. Solar lease

Residents who choose not to finance or purchase their solar energy system can benefit from solar energy by either leasing or having a PPA. 

When you lease solar panels, you pay a fixed monthly amount for leasing. When you enter a solar PPA, you buy electricity generated from the panels at an established rate per kilowatt-hour (kWh).

A solar PPA doesn’t work for solar panels on an RV, camper, or other non-permanent dwellings. A PPA is also different from community solar, where a solar facility provides solar power to multiple residences at once.

Find out more about how solar works and the pros and cons of solar PPAs so you can make an informed decision.

Solar PPA visualized

Benefits of a solar Power Purchase Agreement (PPA)

A solar PPA has several benefits, but it’s not for everyone. For example, if you want to take advantage of your solar energy system’s tax deduction, such as the Residential Clean Energy Credit, or net metering benefits, a PPA is not the path you should take. However, a solar PPA might be the perfect solution to use green energy and become energy-independent without paying the upfront costs for your solar system.

A solar PPA lets you use solar panels all year, even in the winter. This arrangement also reduces financial risks compared to solar panel ownership. Other benefits of PPA include:

• Lower energy costs. The developer sells the solar electricity to the homeowner at a reduced price, which may stay the same throughout the PPA term or have an escalator clause. An escalator increases the price incrementally to account for rising utility costs.
• No building decisions. Since you don’t own solar panels when you enter a PPA, you don’t have to worry about buying or financing solar panels and their components and installing them.
• Financing. PPAs don’t require financing or buying solar equipment since the developer takes care of these costs. You don’t need to put any money down either.
• Little-to-no maintenance. Solar panels last a long time, and most come with a 25–30 year solar panel warranty. However, with a solar PPA, you are not responsible for the warranty or maintenance of a solar system. The developer handles those details, and you benefit by using green energy.

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PPA considerations

The return on your investment may be less substantial with a solar PPA than if you were to purchase or finance the solar panel system. With a solar PPA, the developer owns the entire system, so all solar financial benefits will go to them, not you.

For example, the developer can:

• Claim the federal Residential Clean Energy Credit.
• Sell solar renewable energy credits (RECs) to the local utility.

Other PPA costs

• Upgrades to your property: While you don’t have to pay for building the solar system, a PPA may require you to make certain upgrades to your property. Costs from site upgrades, such as trimming trees that block sunlight, can fall on the homeowner. 
• Property taxes: Having a solar energy system on your property is a commodity, so it can raise the value of your home, which in turn can increase your property taxes.

PPA contracts and early termination fees

A PPA is a legally binding financial commitment for 10–25 years. As with any agreement, carefully review your contract with your solar development partner, or get a second opinion if necessary.

Be clear on terms and conditions, especially clauses related to costs, length of the contract, and early termination fees (ETFs). Most power purchase agreements will have an option to end the contract early, but it can be pricey, so review early termination costs before signing the documents.

If you move before the PPA is up, you may be able to transfer the agreement to the new homeowner or move the system to your new residence. Also, consider what happens with your solar system once your PPA contract expires. Typically, you can renew your PPA contract or purchase the system from the developer. Again, check your PPA agreement for specific terms since these options could incur more costs.