Solar Lease vs. Power Purchase Agreement (PPA): Key Differences
Both solar leases and power purchase agreements (PPAs) are ways to benefit from solar energy with little to no upfront costs, but they function differently. Here’s a breakdown:
| Feature | Solar Lease | Power Purchase Agreement (PPA) |
|---|---|---|
| Who Owns the System? | Solar developer | Solar developer |
| How Payments Work | Fixed monthly lease payment | Pay per kilowatt-hour (kWh) of electricity used |
| Cost Structure | Flat fee or escalated payments | Based on energy production, usually lower than utility rates |
| Energy Bill Savings | Indirect – no control over energy prices, but avoids utility rate hikes | Direct – tenants pay for power at a discount (5-20% lower than grid rates) |
| Common Term Length | 15–30 years | 15–30 years |
| Maintenance & Repairs | Covered by the solar provider | Covered by the solar provider |
| Best For | Property owners looking for passive income | Tenants or businesses wanting cheaper electricity |
Which One Is Right for You?
- Choose a Solar Lease if you’re a building owner and want a third party to lease your roof and pay you fixed rent for hosting solar panels.
- Choose a PPA if you’re a business or tenant looking to buy electricity at a lower rate without owning or maintaining the system.
Let’s explore the financial implications of installing a solar energy system on a 100,000-square-foot commercial roof in California, considering both a Solar Lease and a Power Purchase Agreement (PPA).
1. Solar Lease
Annual Lease Payment:
Assuming a lease rate of $0.20 per square foot:
100,000 sq. ft. × $0.20/sq. ft. = $20,000 per year
Key Points:
- No Upfront Costs: The solar developer covers installation and maintenance expenses.
- Fixed Income: You receive consistent annual payments for the lease duration (typically 15–30 years).
- No Direct Energy Savings: Since the developer owns the system, tenants may benefit from reduced energy rates, but the building owner does not directly save on electricity costs.
2. Power Purchase Agreement (PPA)
Annual Solar Energy Production:
In California, a well-optimized commercial solar installation can produce approximately 15 watts per square foot.
100,000 sq. ft. × 15 W/sq. ft. = 1,500,000 W = 1,500 kW
Assuming an average of 1,750 sunlight hours per year:
1,500 kW × 1,750 hours = 2,625,000 kWh annually
Cost Savings:
The average commercial electricity rate in California is approximately 24.18 cents per kWh
.
With a PPA, businesses often secure rates 10–20% lower than standard utility rates.
- Standard Utility Cost: 2,625,000 kWh × $0.2418/kWh = $634,725 annually
- PPA Cost (20% Discount): $634,725 × 0.80 = $507,780 annually
Annual Savings:
$634,725 (utility) – $507,780 (PPA) = $126,945
Key Points:
- No Upfront Costs: The solar developer installs and maintains the system.
- Reduced Energy Costs: Tenants or building owners pay a lower rate for electricity generated by the solar system.
- Variable Savings: Actual savings depend on energy consumption and the agreed-upon PPA rate.
Summary Comparison
| Aspect | Solar Lease | Power Purchase Agreement (PPA) |
|---|---|---|
| Upfront Costs | None | None |
| Revenue | Fixed annual lease payments | Savings on electricity bills |
| System Ownership | Solar developer | Solar developer |
| Maintenance | Solar developer | Solar developer |
| Benefit Recipient | Building owner (lease payments) | Tenants/building owner (reduced energy costs) |
Considerations:
- Solar Lease: Ideal for property owners seeking a steady, passive income without involvement in energy sales or system upkeep.
- PPA: Suitable for those aiming to lower their electricity expenses without the responsibilities of system ownership.