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Some individuals and businesses have the financial wherewithal to pay for their PV systems outright. State, local and federal incentives, of course, make systems more affordable. Others take out loans — home equity loans or small business loans — to finance their systems. Unfortunately, not everyone has access to money required to purchase a system, even with incentives, or wants to incur that kind of debt. If you are one of them, there are some alternative financing mechanisms that could make your dreams of a PV system come true. They’re power purchase agreements and leases.
Power purchase agreements (PPAs) have been used for decades to finance large commercial power projects. Thanks to the pioneering efforts of California-based SunRun and other similar companies, power purchase agreements are now being used to finance PV systems for homes and small businesses in California.
In an article in Home Power magazine, (issue 128), Charles W. Thurston, author and market analyst, explains how SunRun’s power purchase agreements work. For a fraction of the typical initial cost, he notes, a solar-electric system is installed on a customer’s home by one the company’s installers. SunRun owns and operates the system and sells the generated electricity to the homeowner at a slightly lower rate than utility customers in the area are paying. In addition, the contract stipulates an annual increase in the rate that's lower than those experienced by utility customers. This agreement is typically in effect for about 18 years. At the end of each month, the customer receives two bills, one from the utility and the other from SunRun. If the system was sized to meet 100 percent of a customer’s demand, the utility bill may be quite small.
A 2008 law in California makes it easier for solar companies to sell PPAs, so those living in the state can expect to see many other companies entering the field. For those outside of California, SunRun and other companies are looking to expand their programs elsewhere, so stay tuned. You can visit SunRun to see if they’re offering PPAs in your region.
Although power purchase agreements have traditionally been used to bring PVs to single family homes, they have also been used to finance rooftop PV systems for entire real estate developments in California, thanks to the work of Open Energy Corporation. This company finances the entire project so there’s no upfront cost to the developers or future homeowners, according to Thurston. The benefits to developers are several, according to John McCusker, a representative of Open Energy Corporation. Builders receive the tax credits and enjoy robust sales — their units sell four times faster than comparable, nonsolar residences in the area. Homeowners benefit, too, as they not only incur no upfront costs, they enjoy lower electric bills, and live a more environmentally friendly lifestyle. They also end up with a residence that could sell more quickly when time comes to put it on the market.
Another option, with lower up-front payments, is a lease. In California, SolarCity has teamed up with investment bank Morgan Stanley to provide leases that could make solar electricity even cheaper than most power purchase agreements. The company installs the PV system at their cost. They and the homeowner typically sign a 15-year lease that guarantees a certain amount of electricity from the PV system, based on the size of the system and conditions at the site (tilt angle, orientation and shading). Most systems are slightly undersized so they primarily produce electricity to offset the most expensive peak utility rates. This lowers lease payments, and maximizes savings for the customer. Customers that lease PV systems typically end up paying slightly less for electricity. The lease also guarantees a fixed rate for the term of the agreement, providing a hedge against rising electric rates.
Lease programs are currently available in California, Arizona, Oregon and Connecticut. Expect to see other companies enter the market in other states.
Lease programs and power purchase agreements are quite similar. The main difference is that in lease programs there’s typically no down payment. However, as Thurston explains, “if you can afford to invest up front in part of the system cost (through a PPA), you’ll pay less as time goes on, and your savings can be greater at the end of the contract. In that case, a PPA may be more beneficial.”
Despite Thurston’s analysis, representatives from both industries argue that the financial costs and benefits are not that different over the long haul. “The bottom line is that a solar lease or PPA makes it possible for any homeowner to stop talking about tomorrow and act now,” says Thurston. If you’d like to power your home with solar electricity, but can’t afford a system or don’t want to borrow the money, consider a lease or a power purchase agreement. If you can afford a system of your own and can benefit from local rebates, you may want to consider installing one yourself. The economic benefits can be many and can result — under optimum conditions — in very affordable and clean electricity.
Contributing editor Dan Chiras is a renewable energy and green homes expert who has spent a lifetime learning life’s lessons, which he shares in his popular blog, Dan Chiras on Loving Life. He’s the founder and director of The Evergreen Institute and president of Sustainable Systems Design. Contact him by visiting his website or finding him on Google+.