Commercial Solar Lease vs. Power Purchase Agreement – What’s the Difference?

  • February 10, 2020

It’s a common scenario: a business owner, school or municipality decides it wants to move to solar power. The reasons for that are usually varied. On-site photovoltaic (PV) generation is a great way to hedge against volatile electric utility bills and reduce one’s carbon footprint. But after doing a bit of homework, many decide that solar is too complicated, too costly, or complex to pursue in earnest.

To some extent, these people aren’t wrong. Understanding solar power CAN be complicated. It CAN be costly. And solar financing, in particular, CAN be quite complex.

On the flipside, a little guidance can go a long way. For instance, it’s important to understand that the federal tax credit is set to expire in the next few years.  Furthermore, the cost for commercial-scale solar has decreased significantly over the last 5+ years. Also, as far as financing, there are more options available today than ever before.

There are two tools that we often recommend when it comes to financing commercial-scale solar projects: solar leases and power purchase agreements (PPAs). The two financing structures are similar but have certain nuances that the borrower needs to consider before opting for one over the other.

Commercial Solar Leases

Commercial solar leases, sometimes referred to as solar services agreements (SSAs), allow customers to lease a PV system from a 3rd party, thereby avoiding the up-front costs of investing in the equipment directly – usually the largest barrier to entry for most business owners. The 3rd party is responsible for financing, owning and maintaining the solar energy system.

Under a commercial solar lease, the customer pays a fixed monthly fee (regardless of system generation) to use the 3rd party’s equipment, and in exchange, they get any power generated by that equipment. The lease payments are usually offset by the value of the energy savings generated by the solar array. In most if not all cases, the monthly electric bill savings exceeds the monthly lease payments,

Leases are generally structured over a 10- to 20-year period.

This model avoids the retail sale of electricity.  Solar Leases are allowed in  states such as Florida and Arizona, which do not allow 3rd parties to sell electricity in the PPA model described below.  Also, solar leases typically come with a production guarantee as well as have flat monthly payments throughout the year.

Power Purchase Agreements

A power purchase agreement, otherwise known as PPA, is a slightly different 3rd party model that also helps to address the high up-front costs of installing an on-site PV system. The commercial solar PPA model allows a solar developer to own a PV system, typically on the customer’s property, and then sell the power back to the customer.

The benefit to the PPA model is that it enables the customer to avoid all of the upfront costs, as well as responsibilities for operations and maintenance, and just purchase the power from the 3rd party at an previously agreed upon rate. Unlike a commercial solar lease the monthly payments to the 3rd party will vary every month as they will be based on how much electricity the solar system generates.  In the summer months when the system is generating more electricity payment to the PPA will be more and vice versa in the winter when the system is not generating as much in the summer.

With a PPA, solar customers lock-in a $/kWh for energy sometimes for as long as a 20-year time horizon. This insulates customers from volatile electric rates and makes it easier for a company to accurately budget for its energy costs over an extended period of time.

Both commercial solar PPAs and Leases are often structured to allow the solar customer to buy the PV system at market value at the end of the PPA term. Alternatively, there may be an option to extend the lease or PPA for 1 to 5 years if the customer is so inclinded. Otherwise, at the end of the PPA or lease term, the customer typically can ask the 3rd party to have the system removed from the site.

Other Considerations

For government entities – such as municipalities, school, water districts and housing authorities – and nonprofits, PPA and leases are the best solution since these entities cannot take advantage of federal, state and / or local tax credits and accelerated depreciation on the solar equipment. However, the consideration of the tax benefits is one that needs to be most carefully analyzed by private sector companies. Because the commercial company that leases the equipment or signs the PPA does not own the equipment in either of these arrangements, they collect the tax benefits. Instead, the solar developer claims these benefits.

That doesn’t mean the PPA or solar lease is not the right solution for most private sector companies as both Walmart and Amazon do 3rd party solar lease or PPAs for their electricity needs.  It just means companies need to be aware of their options.

Learn More

Interested in learning more about how to finance PV solar systems? Contact us today. AVANA Capital has a proven track record of finding creative financing solutions for customers of all sizes

By: Walter Cuculic & Mo Fayyaz