How can companies like SunRun, Sungevity, and SolarCity provide a zero down or $1000 down solar lease while charging less per month than a utility company? Sound too good to be true? It’s not. Here’s a high level overview of how solar leases or power purchase agreements (PPAs) work.

First, let’s briefly review how a homeowner would purchase and install a solar system without the benefit of a solar lease or PPA. A home owner purchases the system and pays for installation–either outright with cash or via some form of financing (e.g. a home equity loan). Disadvantages of this approach include the need for a significant amount of capital and the fact that the homeowner is responsible for maintenance and repair if anything goes wrong with the system that isn’t covered by a manufacturer’s warranty. However the advantages of buying a system outright are that the panels usually continue to produce energy well past their 25 year warranty, they often require very little maintenance beyond washing the solar panels twice a year, and once they pay for themselves everything you save after that is yours to keep.

The solar lease is designed to address two concerns of homeowners considering solar: the large upfront cost and the hassle/obligation of ongoing maintenance during the life of the system. Companies offering solar leases or PPAs purchase and operate the system on behalf of the homeowner–and take on all maintenance and repair obligations–in return for a the homeowner’s long-term (10-20 year) commitment to lease the solar equipment at a fixed monthly rate (solar lease) or to purchase the power produced by the system at a designated price per kilowatt-hour (solar PPA).

In order to make the business model work, solar leasing companies must raise significant amounts of capital, normally from tax equity investors or from commercial lenders. This capital, often referred to as “project finance”, allows the solar leasing company to make the upfront purchase of solar components and to pay for installation. Solar leasing companies collect the federal “Solar Investment Tax Credit”, as well as any applicable state/local incentivesassociated with the project and handle the paperwork associated with installation and permitting of the new system.

The tradeoff homeowners should consider is the size of the upfront payment versus the long term savings. Buying a system outright has the greatest long term savings, but requires a big up front cash (or finance) payment. The alternative is much smaller monthly lease payments which result in almost instant savings over the prior energy bill, but result in less money saved over 20 years when compared with an outright purchase. It depends entirely on which approach better matches your financial situation and financial goals.

The question is, do you want to buy your solar power system outright or lease one? Or if you already have solar panels on your house, how did you choose to pay for them and why?

Reprinted with permission from Cleantechies