What to Know about Solar Power Purchase Agreements a.k.a. "PPA"
PPA vs. PG&E: it's silly to compare
Play along here and imagine with us for a second that you already signed up for a power purchase agreement and are buying solar power from your roof at a fixed rate per kilowatt hour.
(We'll explain why you might sign up for a Power Purchase Agreement and the PRO's versus CON's in a bit, don't worry)
So you're buying solar power from your roof already, and it's guaranteed in your agreement to never increase in price and the PG&E sales representative knocks on your door.
They tell you that if you turn off your solar system you'll enjoy:
a higher monthly payment than your solar PPA
your cost of energy will go up 11.3% this year (CPUC source)
and when the power goes out everything turns off.
You'd be crazy to sign up for that, right? Of course and that's what you're agreeing to by not getting solar. Deciding to not get solar is effectively saying "I'm ok paying a higher price for the same electricity and I'm totally fine with my rate increasing every year."
That sounds silly even to type and we know it's not the logical thing to do. But, you might be surprised to know that many of our clients come to us still unsure about solar because they've heard about nightmare installs or changes to the industry.
But unless you own stock in PG&E, it makes sense to take a serious look at solar and to understand whether or not the Power Purchase Agreement (aka PPA) is the right way to do it.
Power Purchase Agreement Basics
The power purchase agreement, in its current form, has been around for over a decade. It's a tried and true method for switching to green energy and it makes a lot of sense... for the right person.
When you sign up for a PPA, as they're commonly called, you're locking in a rate in cents per kilowatt-hour that you agree to pay for each kilowatt-hour of electricity produced just like how PG&E bills you. The key is that this $/kwh is lower than PG&E and can even include a 0% annual increase meaning you pay the same rate in 10 years regardless of inflation... something PG&E will never offer. But...
It's essential to understand three things about a PPA before you sign:
You do not (and will not) own the system
You cannot seek the Federal Solar Tax Credit (ITC)
You cannot terminate a PPA early, for any reason
Don't let these things scare you though because the PPA is a great tool for lowering your electricity costs. But, let's expand on these for you.
You do not (and will not) own the system: When you sign a power purchase agreement, you're allowing a company to come install a solar system on your home for precisely zero cost to you. You don't pay for equipment, labor, permitting, or anything. It is literally zero out of pocket cost to you. But why would a company do that if "nothing in life is free" as they say?
Because, the company owns the equipment and all you're doing is agreeing to buy the power it produces. And they're happy to cover all the costs of installing the project because you (or the next home owner) will buy power from that system for 15-25 years.
And homeowners are eager to do this because the rate they agree to pay in the agreement is lower (in some cases a lot lower) than PG&E.
But it's also nice to know that because you don't own the system, you will never be responsible for any costs to keep the system functioning.
You cannot seek the Federal Solar Tax Credit (ITC): because you don't own the system and paid $0 to get solar installed. Kind of silly to ask for a tax credit on $0 spent, right?
But it does bring up a really critical point that if you don't have a Federal tax liability, the Power Purchase Agreement is the best way to get solar. Why?
Because the company that owns your system gets tax benefits from installing your system and that's partly why they're able to offer you a power rate that is lower than the utility.
So often we represent clients who aren't clear about what "tax liability" means, though. While we are not tax professionals and always recommend consulting your tax pro to verify your tax liability status, we can say there is a key difference.
If you file your taxes for this year and either A) the IRS will keep a large chunk of the amount you withheld or B) the IRS is expecting you to pay them because you're self employed, then it's safe to say you have a tax liability.
And if that's the case, you may be better off buying solar instead of signing a power purchase agreement. Consulting with us allows you to compare the two and see which is better for your situation.
You cannot terminate a PPA early, for any reason: you, or the next homeowner if you sell, will be agreeing to buy power from the PPA through the end of the term, usually 20 years. There is typically an option in the agreement to buy-out the remainder of the expected payments so you can enjoy solar power without monthly payments and there is a penalty to do that.
This sounds scary but it's important to frame up what you're doing here. This isn't a car that you want to trade in for a new fancy model in a few years. Solar panels are specifically designed to last 20-25 years at highly productive levels. The longer you have solar, the better off you are since you got it at a cheaper price.
Cheaper price? The cost of everything is going up. Inflation was nearly 12% in the first quarter of 2022 and while abnormal, it's common knowledge that things get more expensive over time. Solar equipment, labor, overhead for warehouses etc are all going up and government incentives typically reduce over time.
With that perspective, it's in your best interest to keep the solar working. Of course at the end of the PPA term, be it 20 or 25 years, there may be options to renew, remove or take the system. It's highly unlikely that a solar company will want to cost themselves thousands by coming to uninstall and dispose of your old system so industry experts expect most PPA customers to simply "get" the systems and what ever productive life they have left.
Here's the secret to quickly figuring out if the PPA is right for you:
Tons of Write-offs
Kids, business losses etc. can mean that the IRS isn't expecting you to owe them or may give all of your withholdings back.
Certain folks with disabilities, low income etc may be entirely exempt from IRS taxes.
PPA Essentials and Examples
Zero Down Payment
0% to 2.9% Escalator
20 to 25 Yr Terms
Any good power purchase agreement will include these four items.
Why are PPA's zero down? If you read the first section closely it's because you don't own the system. Only when the system is completed with approval from the local building department and PG&E will it be turned on for you to buy the energy produced.
It's worth noting that some providers allow you to "pre-pay" for the power the system is projected to produce over the term of the agreement. Doing so is a great way to lower the price per kilowatt-hour of your agreement.
Power Purchase Agreements aren't great for the haggler who wants the lowest possible price. If you want that, like when you buy a home or a car, you need to be a cash buyer. Cash is king. Because PPA's are installed completely on the system owner's own dime and most homeowners opt for zero pre-payment, it means the installer (or their investor) won't make their money back on the system for many years.
Pre-paying some or all of the power to be produced helps the system owner recoup their investment faster and so they're willing to take a lower return. So, if you're angling for the lowest possible price per kilowatt-hour, be prepared to pre-pay.
When you pre-pay for the 20 or 25 years of power, you also enjoy 0% annual escalation on your price per kilowatt-hour. But our clients are sometimes surprised to learn that you don't have to pre-pay to get a 0% annual escalator.
PPA's are designed to increase at the typical rate of inflation so that once per 12 months your rate increased by exactly 2.9%. Your contract will have a table showing exactly what your price per kwh will be each year so it's very predictable and safe. Why does this exist? This allows you to start at the lowest possible $/kwh rate in year one meaning you maximize your savings from the start.
This is the smartest play if you plan to sell in a few years as it saves you the most money now. And the new buyer may ask about the escalator but can be kindly reminded that PG&E increases their price per kilowatt-hour 5-10% or more per year. So this is all around a better deal.
But, if you're planning to stay in the home long term and want to never see your price of electricity increase, you can ask for a 0% escalator. You will have no choice but to accept a higher starting price per kilowatt-hour though and so you're initial savings might be less but typically around year 7-10 you start to reap the benefits.
For example, a Power Purchase Agreement with a 2.9% annual escalator might offer a starting price per kwh of 18 cents. So for every kilowatt-hour the system makes, you pay 18 cents. And in year two you'd pay 18.5 cents per kwh and so on.
Selecting a 0% escalator means your starting price per kwh may be more like 24 cents and so you give up some initial savings in return for much more savings later in the term of the agreement. In this example, it will take 10 years for the 18 cent PPA to reach 24 cents per kwh. So if you plan on being in the home longer than 10 years, it makes sense to go the 0% escalator route.
It's also worth noting that if you do sell early, it could be nice to tell the buyers that their escalator is 0%. People like how that sounds.
Speaking of selling, one of the lesser-known things about Power Purchase Agreements is that they have to transfer to the new owner of the home. In the past, this has caused issues because the buyers may be qualified to buy the home but for some reason the PPA provider wouldn't like their credit report and decline them, stalling your home sale.
Now there are PPA providers who guarantee transfer to the new buyer and that is critical. We help clarify that for our clients so they understand that when we represent them in getting a PPA, they will get one that includes this guarantee of transfer so your home sale is never put at risk.
Now, let's check out these common scenarios so you get a sense of how a solar PPA can work for you.
Plans to be in the home for 10 years
Average PG&E bill = $334 / mo
PG&E's yearly rate increase is 8%
7 Kilowatt solar system facing due south
In this case, the total cost of PG&E energy over 10 years = $58,062 (this is what you want to avoid)
Most Initial Savings
Yearly Increase: 2.9%
Term: 10 (of 20 yrs)
1st year PMT: $151/mo
Price per kWh: 17.6 cents
10-yr Savings : $37,385
No Escalator Option
Yearly Increase: 0%
Term: 10 (of 20 yrs)
1st Year PMT: $195/mo
Price per kWh: 22.8 cents
10-yr Savings : $34,662
Staying With PG&E
Yearly Increase: 8%
Term: 10 years
Monthly PMT: $334
Price per kWh: 37.1 cents
10-yr Cost : $58,062
What's the first thing you notice? Hopefully it's that both PPA options are vastly better than staying with PG&E. If you haven't gotten the memo by now, it's a fools errand to stick with them.
Looking at the "Most Initial Savings" option, you lower your monthly electricity consumption cost by $183. It's beyond a no brainer, even if you're afraid of committing to a 20 year contract. If you are that person, concerned with that, just realize that you're committed to PG&E for just as long. There's no "contract" per-say but you certainly have no option for "cancelling" PG&E and using another utility.
So if you're going to use electricity either way, lock in a lower rate!
And yes, the price per kWh goes up 2.9% per year but even at year 10 that only amounts to 22.7 cents per kWh, or 14.4 cents LOWER than PG&E's starting point. You don't want to know what PG&E's is after 10 years of rate increases. If we are representing you and this 10 year plan to sell your home is relevant, we'd recommend this PPA option to get you the most savings in the first 10 years.
In the second example, you still save almost $35K but you'll notice that's a little less than the first option and it comes with a higher price per kWh. Still far cheaper than PG&E and you may select this option, even if you plan to sell, for two reasons (A) future protection against rising energy costs if you need to stay in the home longer or (B) gives your home a great selling point of low fixed rate power.
Our mission here is to show the most common PPA exampls that fit what you'll likely need. Consulting with us, which never costs you a dime, is where we can really help figure out the right route for your specific project and plan, be it a PPA, loan or cash purchase.
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