Solar Rent, Lease or PPA - Advantages/Issues For Home Energy

Renting solar panels from electric companies has merit, but is it the best path to home solar energy and why use solar in the first place? To answer, we'll start with a quick review. Probably, like many home owners, you've heard and read about the benefits of alternative energy for your home (especially solar). For instance, just some of solar technology benefits are:

- reduced electrical energy costs

- help protect the environment

- reduce dependency on foreign oil

All great reasons. However, if you've done any basic investigation at all, you've probably discovered that entry into the solar energy club comes with a pretty hefty price tag. Depending on which renewable energy technology you had envisioned implementing, (photovoltaic solar system, wind turbine system, or solar thermal system) the initial capital cost probably placed even a basic system out of financial reach.

For example, depending on your needs and location, a basic photovoltaic system can quite easily tip the financial scales into the tens of thousands of dollars range (e.g. $20, 000+ and far beyond), and that's with no bells or whistles. This quite reasonably produces an involuntary gasping shudder from most homeowners. So daunting is the prospect, that many will simply give up on the idea of a solar energy powered home.

Enter: Alternative Solar Financing

So, if you're not a do-it-yourself type, (and it's a wise person who knows their limitations) and you don't have a money tree in your backyard, but believe that alternative energy benefits are right for you, what can you do? As with automobiles, there are effective options for acquiring ownership benefits without actually owning the asset. Have you guessed?

Yep, that's right! Enter into a rent, lease or Purchase Power Agreement (PPA) to acquire the solar energy benefits that are right for you (we'll use "renting" and "rental" as representative general reference terms for solar PPAs, leasing and renting). The advantages of renting solar panels (actually the entire system) through agreement, can be quite significant. Typically, the entire system is installed, made operational, serviced and maintained over the term of the contract at zero cost to the homeowner (homeowner simply buys power). In other words, all homeowner start-up costs for a photovoltaic system are entirely eliminated. In the best agreements, the homeowner only pays for the monthly energy produced by the system and consumed by the home. That's it. No down payment, no installation fees. no permits. The arrangement can yield financially and technologically superior results to the do-it-yourself (DIY) solution since the vendor installs a system that is designed for commercial grade reliability and high productivity.

So, what are the specific objectives of these agreements? How do they work? Let's look more closely.

System Rental, Leasing and Purchase Power Agreements (PPAs)

There are solar PV businesses that team up with financing companies whose business models create agreements for renting, leasing and setting up PPAs. It can be profitable for both you and them (in the long run) to place a solar alternative energy system on your property. You get the benefits you want (lower long range utility costs), while they satisfy their profit motive. How?

Basically, some companies are in the business of wholesale energy production (electric companies) and/or system sales and service. The power wholesalers essentially want to use your home's roof as a place from which to generate enough energy to take care of all your residential electrical energy needs and then sell any extra power (beyond net metered break even) back to the local commercial power company for profit. For others, the customer's monthly rental payment covers servicing their monthly installation finance cost (interest payment + principal retirement), operational expenses and profit target. If they've done their calculations correctly, selected the proper installation sites and installed appropriately productive systems, they will easily make their profit target that way. Other companies use a combination of the methods.

The systems can be expensive, however, keep in mind that solar provider companies install solar systems at a comparatively low cost. Using volume wholesale component procurement practices, sometimes directly from the manufacturer, allows them to achieve efficiencies of scale that greatly lower their installed system costs. Routinely that installed system cost is far below that achievable by the average homeowner. This is especially true when compared to the cost of a retail system purchase and installation. Even a DIY system is subject to productivity drawbacks because technological state of the art components may not be available to the DIY er. For example, the latest generation of tubular solar PV panel design does not require tracking equipment to maintain maximum daily output. This is due to a 360 degree collection surface for each cylindrical tube collector element. The tubes not only capture and convert light on the sunward side of an installation. as the sun moves across the sky, they can also capture light reflecting off of the roof surface beneath the panel (see graphic) to maximize output. Yet these innovative panels are mostly found in commercial installations (typically not available for residential retail). In any case, compared to rental, there are very few ways for the DIY system to begin delivering a comparably commercial bundle of solar benefits for zero cost or the cost of a commercial utility payment. Again, when done properly, the system power output and monthly contract payment will eliminate the need for a monthly payment to the local power company (ideally).

Overall, for the provider, rental systems translate to a very low dollar cost per peak watt. Where the retail cost may be in the range of $5 - $10 per watt (before rebates and incentives), an installed rental/lease/PPA system can carry a cost as low as $2.50 per watt (sometimes lower). By the time incentives and rebates are factored in, there is more than enough financial room to make the business model viable and profitable. Basically, if they can't produce a cheap and reliable watt at your site, for you to buy (at a profit), then their model fails and they go out of business. This means that it's in their financial best interest to make certain that an installed system stays productive. In fact, for some agreements a shortfall in power production will cause a corresponding partial refund of the monthly payment.

So what are the mechanics of renting/leasing a system or setting up a PPA for a residential site? What's the process?

The Basic Process

Originally these agreements were conceived and implemented specifically for the commercial/industrial marketplace. They were typically very complex 15 - 20 year long term contracts requiring the application of highly trained legal and power generation experts that negotiated for both the system provider and business owner. As applied to the residential market, they can be shaped (depending on circumstance) as quasi pay-as you-go or rent-to-own purchase plans. Compared to the commercial/industrial forms, the contracting process can be much simpler. Depending on the company, the basic renting/leasing/PPA process consists of the following steps or project phases:

1) Preliminary assessment of your site solar resource, home energy needs and credit viability - most experienced companies that have operated in your area will already have a general knowledge of the solar energy resource available for your geographic latitude. If there isn't enough solar resource at your site, it's likely the provider will decline. What they'll want to do is visit your home to evaluate:

- the monthly amount of energy consumed by the home over the previous 12 mos.

- the amount of space available for an installation

- roof mounting orientation relative to the sun

- the proximity of any productivity negatives (shade casting trees, neighboring buildings, etc..)

- the condition of the roof in terms of needed maintenance

- project approval based on acceptance of homeowners long term credit rating (many companies want a minimum FICO score of 650 - 700)

2) Engineering and Construction Plan Development - If the preliminary site assessment is approved, the system provider will begin system engineering and construction project planning. During this stage:

- a specific system designed is selected for the site

- the specifics of site construction are finalized

- permits are acquired

- the local utility company is contacted to resolve any interconnection issues

- homeowner approves agreement and agrees to payment plan

- equipment is procured

3) Project Construction - the solar array and balance of system (BOS) components are installed along with any building structural modifications (if needed). It's important to note that if the home's roof needs maintenance, it should be done before this stage begins. Removing and re-installing a solar system for roof maintenance can be a fairly disruptive proposition.

4) System Inspection, Power-on and Evaluation - Most reputable companies have some sort of inspection and sign-off procedure that includes all involved parties (city inspectors, utility service people, This is to be certain that all aspects of the project have been fully completed. Some companies even include an evaluation period (after system power-up and interconnect) during which the new system is carefully monitored for correct operation

 

Basic Financial Feasibility

The most important basic characteristics of these agreements is that they allow you, the homeowner, to acquire the benefits of a fully operational PV solar system without having to overcome the monstrously huge initial capital cost barrier. They could be a better way to solar your home, but the agreements are not a panacea for all situations. There are issues that should be considered and weighed carefully.

Keep in mind that for the homeowner the financial feasibility of all three agreement types (as residentially applied) is sensitive to 2 main criteria:

1) The installed system should produce enough energy to meet the needs of the residence or at least ideally supply enough energy to drop the home out of the most expensive energy purchase tiers (for tiered retail energy suppliers)

2) The monthly rental/lease/PPA payment for power (or power + system) should be (ideally) less than or equal to the total monthly home electric bill

If the above criteria are not satisfied, then the agreement(s) will not be an economically feasible solar ownership alternative, since the overall point is to use less commercially supplied energy (and hopefully save some money). For example if $100 per month is normally paid for electrical utility service and the agreement cost works out to $120 per month, then (all other things being equal) economically, it's a bad proposition for the homeowner because it translates directly to an increase in his/her cost for electric power. It's even worse if the system fails to produce enough power since the deficit must be made up by purchasing commercial grid power, sometimes at added cost. Additionally, the entire solar house of cards will economically crumble if commercial power prices radically decrease.

It's worth noting that at the extreme, for a zero carbon footprint goal (assuming a grid inter-tied system with no on-site energy storage capability), the rented solar installation would have to routinely produce enough kilowattage during the day to meet the energy needs of the home, and simultaneously produce extra power to offset the homeowner's purchase of electricity from the utility at night (when the system becomes dormant). In other words, in addition to powering the home during the day, the system would also need to build a credit balance to be used at night, when the sun isn't available to generate energy. A system provider may or may not try to support a zero carbon footprint objective. It will depend on their cost structure and the solar resource available to the site. That's why careful site selection and approval is critical (to the system supplier).

In any case, the homeowner generally isn't allowed to select the size, capacity or any features for the supplied system (using a PPA for example), thereby perhaps causing a conflict in system and financial objectives. Consider another example where, even though there may be a financially attractive option to purchase the system at contract end, it may no longer "fit" what's needed. Therefore, the homeowner may want to host a flexible system that allows accommodates growth. The system system provider may not care (this is much less a problem with leasing, especially where a down payment is present).

So, is renting universally a better way to apply solar to your home as opposed to buying or building it yourself? The answer is, not necessarily. It really depends on the priority of the homeowner's alternative energy system and financial objectives. The importance of understanding and quantifying this information cannot be overemphasized (see the "Residential Solar Systems: Part II: Getting Started - Identify Your Objectives, Set Priorities" page at our site). Renting a system may require giving up objectives that outright ownership would leave intact (as mentioned above). Each homeowner must decide whether or not the restrictions or limitations of renting are a deal breaker relative to their objectives.

 

Rental/Leasing/PPA Benefits and Contract Issues:

In addition to the basic financial feasibility criteria (see above) there are other important benefits and issues. Below is a suggested list to which your contract agreement should speak in some fashion. This is not intended to be an exhaustive list. Rather, these are important areas of benefit that should at least be considered for explicit inclusion in your contract before signing.

Maintenance Costs - generally system provider pays for maintenance associated with system component failures. However, if a neighbor throws something on your roof and breaks a panel, some system providers will not pay for the repairs. Given the expense of panels insurance coverage might be prudent.

Upgrade Costs - System upgrades are handled by the system provider. Upgrades may provide greater efficiency, better reliability or simply more convenience. However, most providers will only upgrade a system if there is sufficient economic incentive to do so. It's an area where advanced clarification prevents misunderstandings later.

Rebates/Government incentive programs - no need to wait for activation of incentive/rebate programs, since these are handled by the system provider. Economic benefits should start as soon as the system powers up.

No installation administration - system provider usually handles municipal permits, local utility company issues, system monitoring/tuning (if needed) and all engineering, provisioning and installation details (see above process step plus engineering and construction plan development

Performance Guarantees - Most agreements have a monthly baseline level of power guaranteed to the homeowner. Final performance levels should be explicitly quantified as part of the final agreement (before signing).

Expert System Servicing - finding competent cost-effective servicing contractors is the responsibility of the system provider since the system provider handles all servicing and servicing costs.

Freezes the Cost of Energy - a typical 25 year agreement can provide a hedge against future power price increases look for this feature and benefit

Grid Power Outage Protection - Since most installed systems are high energy, grid-tied producers they will provide some protection against utility grid power blackouts during the day. However, unless the system has battery storage capability, when the sun goes down the system will provide no power. If possible, a small power storage capability might be prudent.

Option to Purchase System - at the end of the contract term some companies will allow the homeowner to purchase the system, in place, at fair market value (independently assessed). A fair market value transaction preserves the system provider's tax incentive status. Although the system will be old (perhaps even obsolete), if it has functioned reliably, purchasing it could be advantageous, otherwise removal may be warranted. The system provider should always pay for system removal.

Early Agreement Termination - there could be many reasons for a homeowner to terminate an agreement before the scheduled end of contract term (sold home, major roof repairs, upgrading to a larger system from a different vendor, not satisfied with system, etc..). Be sure to know the conditions and consequence of an early contract termination.

No Energy Taxes - examine your power bill and you will find that the energy purchased from your local power provider is taxed (heavily depending on region). Power consumed from a rented system is treated the same way as food grown in a backyard garden, no taxes. In a rental situation, the savings may go directly into the homeowners pocket.

 

Rental/Leasing/PPA Drawbacks:

With all their benefits, there are some disadvantages to these agreements.

Requires good credit rating - most companies (especially financing partners) want to know that the homeowner has a history of making bill payments on time

Scheduled Payment Increases - Some system providers include a cost increase schedule as part of their agreement. Six percent per year (6%/yr) is not unusual. Others schedule an increase for every five years.

Payment Default - be sure to understand the consequences of missing a monthly payment. Some providers stipulate penalties and surcharges.

System Expansion Difficult - Perhaps you want to put in a hot tub or new walk-in tub shower with electric heater and jacuzzi jets. If residential power needs change (especially an increase beyond the contractually guaranteed service level) it can be difficult to re-negotiate the agreement to add capacity. Be sure to explore this area before finalizing the agreement.

No System Selection Allowed - As mentioned earlier, typically the homeowner is not allowed to choose the size, capacity or features of the initial system.

Fixed Price Power Cost Cuts Both Ways - if for some reason the cost of commercial power falls, then the home owner will find himself locked into an agreement paying more for energy than commercial rates

Other Issues to Consider

Solar PV system rental/Leasing or PPA setup is a long term proposition. Primary emphasis and mind set for the arrangement must be directed to purchasing power for the home. Some home owners have trouble adopting a renter's mentality in this regard because they feel a need to own the equipment (and unfortunately the potential problems).

If all goes according to plan, the result may lead to purchasing the solar system at the end of the contract. Keep in mind that commercial grade systems by nature tend to be more robust than consumer grade systems. Even so, a purchase decision will warrant careful evaluation of the systems current health, installation care and any system operation/performance issues that surfaced during the contract term. Be sure to stipulate that a neutral disinterested party is to be selected for this task.

Most system providers will evaluate a prospective site (phase 1 above) at no cost to the homeowner. This is of significant value as it can produce very useful information about the viability of the site for harvesting solar energy. Regardless of whether or not the site is approved by the system provider, the analysis report can be very useful. If the homeowner wants to proceed on their own, the free assessment arms them with information about any site issues that will need attention.

Conclusion

Solar PV system rental/leasing or PPA products can be a very viable and useful way to apply solar energy to a home. If used with care, they can provide some of the best benefits of ownership, with very few drawbacks. However, it's best to shop around for a flexible system provider company with which to work. Leverage the experience of neighbors and local businesses that have gone through the process of executing an agreement and have lived with the installed system. Get recommendations and referrals. They can go a long way in shedding light on how to avoid problems. When it comes to solar rental agreements, information is your best ally. The dollars you save may be your own.

System Suppliers Ofering Alternative Financing

There are a number of vendors that have various alternative financing products that can smooth the way into home solar energy. As you might expect, not all vendors are in all states and offer different financing products by state. As we mentioned earlier, shop around to find the best fit for your needs using their free site assessment services. See the list below of vendors and their operating territories:

SunRun Inc. - California, Arizona, Massachusetts. Purchase Method: Cash, Solar leases and PPAs

SolarCity Inc. - Arizona, California, Oregon, Purchase Method: Cash, line of credit, PPA or lease