Wiser Capital Blog

September 18, 2014 | No comments yet

Weighing Your Financing Options: Power Purchase Agreements and Leases

The solar industry is booming, with much of the growth coming from third-party ownership in the form of leases and power purchase agreements (PPA). These tools can help home and business owners who cannot afford the capital costs of going solar and who don’t qualify for, or can’t take the federal tax credits. Unfortunately the market has traditionally done a poor job of differentiating the two funding mechanisms and helping people understand which one will meet their needs.

Both options allow the host customer to receive cheaper, cleaner, and consistently priced electricity, while the third-party investors acquire valuable benefits, such as the federal investment tax credit and a return on their investment.

Power Purchase Agreement

A PPA is a financial agreement with a third-party investor who will own, operate, and maintain the photovoltaic (PV) system. A host customer agrees to house the PV system on its property and purchase the electricity generated by the system for a predetermined period of time, often 20-25 years.

With this arrangement, the host customer buys the electricity produced by the PV system; they do not buy the PV system itself. The host will receive a monthly bill for the energy produced by the system at an agreed upon rate. If for some reason the system does not generate power, the host would not pay anything to the solar energy provider, but instead would buy additional power from the utility.

The host may have a say in negotiating PPA terms, which includes the price of energy, if the price stays fixed or escalates, and if the host wishes to contribute initial funding to buy down the PPA rate. At the end of the PPA term, the host has three options 1) extend the term, 2) ask the developer to remove the system, or 3) purchase it for the fair market value.

Power purchase agreements enable a host customer to avoid the traditional obstacles of purchasing solar power, such as: high up-front capital costs; system performance risk and maintenance; and intricate design and permitting processes. In addition, PPA agreements can have the added benefit of being cash flow positive for the host customer from the day the system is installed.

LEASE

A solar lease is similar to a PPA in that the host facility pays nothing upfront and the system is financed by a third party. The difference is that instead of paying for the power a PV system generates, the host customer pays for the equipment over time, often through fixed monthly lease payments.

Unlike a residential solar lease, a commercial lease tends to conform to standard commercial equipment leasing terms. A standard lease term is 7-10 years. Sometimes there is an option to extend an additional two years for a total of 12 years in the term. At the end of the lease term, the host customer must purchase the system at a predetermined percentage of the original value, usually 20 percent.

The main difference between a solar lease and a solar PPA is that with a solar lease the host pays a fixed monthly payment for the equipment, while with a PPA the host pays per unit of energy produced (measured in kWh). Advocates for leases promote the certainty of a fixed monthly payment and that the host will own the system much sooner. Unfortunately if the system is down, the host is still responsible for making that payment, even if no energy is produced. The leases’ shorter term and end of term buyout also makes it more difficult for host facilities to see immediate savings.

Some utilities, such as Los Angeles Department of Water and Power, require leases for third-party financed systems. In these cases, Wiser Capital does provide a lease option, but for all jurisdictions where allowed, we prefer to utilize a PPA. Wiser believes that PPAs offer greater accountability to the host customer and more opportunity for early savings. For more information on Wiser Capital’s financial offerings please contact Support@WiserCapital.com.

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