By Mandy Ellis

There are a number of financing options available for those interested in switching to solar energy. While experts recommend opting for a solar loan if up-front payment isn’t an option, there’s also the choice to lease a solar system or purchase solar power from a third party.

Although the terms may be used interchangeably, solar leases and power purchase agreements (PPAs) are two different things. Before signing a contract, consider how they work, how they differ and how they would impact you.

Solar panels on a house with a red roof
Solar leases and power purchase agreements (PPAs) are two options for homeowners who prefer not to purchase a solar system of their own (Credit: Smileus/Shutterstock)

What are solar leases and power purchase agreements (PPAs)?

Solar leases and PPAs are lease agreements with monthly payments that homeowners have with installers, developers or investors also known as third-party owners (TPOs). Many contracts are zero money down and provide 20 percent energy bill savings, and maintenance, repairs and system monitoring are left to the TPO.

“Think about it as taking an Uber is like a PPA, leasing a car is like a solar lease, financing a car is like financing a solar system, and buying a solar system is like buying anything else where you pay upfront and never pay again,” explained Barklie Estes, president of Nova Solar Inc. in Falls Church, Va.

With certain PPAs and solar leases, monthly payments increase 1 to 3 percent as part of annual escalation while other contracts may offer waived rate increases. Additionally, both usually have buyout periods that allow you an opportunity to purchase the system for market value.

However, with PPAs and solar leases homeowners don’t own the system, which means they forfeit the 30 percent federal tax credit and local incentives like solar renewable energy credits (SRECs). These agreements also last 20 to 25 years, with higher payments than solar loans that continue until you purchase the system or until the system is no longer in use. If you sell your home, a buyer must accept the lease transfer as part of the sale.

Close-up of a man signing a contract
Before you choose a solar lease or a PPA, make sure you understand the difference between the two (Credit: fizkes/Shutterstock)

What’s the difference between a solar lease and a PPA?

With solar leases, homeowners have fixed monthly payments calculated by using the estimated amount of lifetime electricity the solar panels will produce, then breaking that up into equal monthly payments. PPAs, which work similarly to utility bills, are paid every month for the system’s generated power at specific per-kilowatt prices, which are lower than typical electricity rates.

“PPAs are buying all the energy produced, meaning your monthly payment varies because the system production is different each season,” said David Yoo, founder and CEO of Pingo Solar in Buena Park, Calif., “With solar leases, your monthly payment is stable because it levels the total amount and breaks it out into even monthly payments.”

With a solar lease, if the system doesn’t produce as simulated, you’re out of luck, but with a PPA, if the system breaks, you don’t pay because you only pay for what it produces, explains Estes.

A construction worker installs solar panels on a roof
Experts advise purchasing a system of your own to take advantage of federal tax credits (Credit: Elena Elisseeva/Shutterstock)

Which one is right for you?

If you like a monthly payment that’s based on usage and don’t mind seasonal price changes, then a PPA might work for you. If you prefer a predictable monthly payment with the option at the lease term’s end to renew the contract or buy the system for market value, a solar lease may be best.

But with the explosion of solar loans, solar experts agree financing or cash are the top purchasing options. “If you have capital to buy the system that’s best because you take advantage of tax and local incentives, and don’t have to factor in the cost of borrowing money, which can be extreme,” explained Ryan Nicholson, sales manager for Sustainable Energy Systems in Frederick, Md., “If not, financing a system with a solar loan is the next best, especially if you can do it through a home equity loan.”