In the pursuit of cleaner, more sustainable energy, homeowners worldwide are increasingly turning to solar power as a viable alternative to traditional electricity sources. However, the upfront investment required for rooftop solar energy systems often poses a significant barrier. This is where power purchase agreements (PPAs) come into play. 

Through the PPA financing model, homeowners can reap the benefits of solar power, such as reduced electricity bills and a lower carbon footprint, while leaving the system ownership, maintenance, and operational responsibilities to third-party providers.

What is a power purchase agreement (PPA)?

A PPA operates similarly to a lease, where a homeowner enters into an agreement with a third-party company that owns the system. The third party then sells the power produced by that system to the homeowner by kilowatt-hour (kWh). PPAs may feature balanced monthly payments or fluctuate based on the actual energy production of the system.

How does a power purchase agreement (PPA) work?

Ownership

The homeowner does not own the panels. Ownership of the solar panel system remains with the third-party company, which also handles installation, maintenance, and repairs. 

Payments

1. Per-kWh Rate: The fundamental aspect of a PPA is that the homeowner agrees to purchase the electricity generated by the solar system at a predetermined rate per kilowatt-hour (kWh). This rate is usually lower than the average rate offered by the local utility company, providing immediate savings on electricity costs.

2. Monthly Payments: A homeowner’s monthly payment under a PPA is typically calculated in one of two ways. Either the provider will calculate a balanced or fixed billing structure based on the projected production of the system or it will be based on the power the system produces each month; production or variable billing. Balanced billing results in more predictable monthly payments where production billing can vary with weather conditions and seasons, and will fluctuate accordingly. PPAs with production or variable billing typically pay more during sunny months when the system's electricity production is higher and less during periods with less sunlight.

3. Escalating vs. Fixed kWh Rates: Most PPAs include an annual increase or escalator, where the per-kWh rate rises by a predetermined percentage each year.  However, some PPAs offer a fixed rate throughout the term of the agreement.  

Maintenance

The company selling the homeowner solar panels is responsible for maintenance and repairs and ensuring the system operates efficiently.

End of PPA

At the end of the agreement, homeowners can typically choose to extend the PPA, purchase the system, or request to have it removed.

Financial benefits of PPAs

With a PPA,  homeowners benefit from the lower cost of electricity produced by the solar system. Similar to leases, homeowners do not receive tax credits, rebates, or incentives, as these are retained by the third-party company, which means PPAs can be a good option for homeowners who are not eligible to claim these credits.

Other ways to pay for solar

As the demand for renewable energy solutions continues to rise, PPAs represent a crucial step toward making solar energy accessible to a broader audience. If a PPA isn’t the right fit for you, there are two other finance options; solar loans and solar leases. Learn more about the three ways to finance the switch to solar here. 

The bottom line

By aligning homeowner and third-party interests, PPAs drive the global shift to renewable energy. As solar energy expands, the flexibility of PPAs will draw more participants, accelerating sustainability. For homeowners seeking cost-effective energy solutions, PPAs provide a compelling path to embrace the green energy revolution, harnessing clean, renewable power from the sun.