Solar leases vs. solar PPAs: What's the difference?

Many solar installers advertise solar leases or power purchase agreements (PPAs) as an easy way to reduce your electricity bill. And they're not wrong; if you're interested in a simple, low-maintenance way to install a solar panel system for your home, leasing solar panels can be a good option. 

But you'll save a lot less over time with these types of third-party ownership financing arrangements compared to a solar loan or paying upfront. Solar leases and PPAs are very similar, but with a solar lease, you will pay a fixed amount of money per month, while with a PPA, you'll pay per kilowatt-hour. 

Here's what you should know about both.

Do you lease your car or have friends that do? Solar leases and PPAs work similarly. With these financing options, instead of buying a solar panel system, you can lease it for 20-25 years and still receive the energy produced by the panels.

During this time, you pay the solar leasing company for the benefits of the solar panel system (i.e., the solar electricity powering your home). However, because the solar leasing company owns the equipment, they are responsible for maintenance. They are also entitled to all the rebates, tax breaks, and performance-based incentives available for solar in your area.

While you'll often see the terms "solar lease" and "solar PPA" used interchangeably, there's a key difference between the two.

With a solar lease, you agree to pay a fixed monthly lease (e.g., $150 a month). Your leasing company determines this amount based on the estimated annual production of your solar panel system.

However, with a solar PPA, you agree to purchase the power generated by the system at a set price per kilowatt-hour (kWh) (e.g., $0.15 per kWh) instead of paying a fixed monthly amount. Because solar panels typically produce more electricity during the summer than during the winter, most people with a PPA have higher solar bills in the summer (and more bill savings) during the summer months.

Between the two, savings are typically the same over the year. In other words, if you average out solar PPA payments over a year, that would equate to a monthly solar lease payment. 

Here's how this might play out for a 7 kilowatt (kW) solar panel system in a state like Massachusetts over 12 months. Let's assume the system covers 100% of the household's electricity usage.

With both options–a monthly lease payment of $96.60 or a PPA rate of $0.15 per kWh–you'd pay about the same over 12 months, generate the same amount of solar electricity, and save the same amount on your utility bills.

Whether you should choose a solar lease or a PPA mostly depends on preference: It's easier to budget lease payments since you know what to expect each month. However, because your solar payment with a PPA is tied directly to your system's production, you have more of a guarantee there that you'll get exactly what you pay for.

Solar lease agreements and PPA agreements are usually more complicated than  solar loans or cash purchases because of the additional terms included.

Here are some common terms included in solar leases and PPAs that you should understand:

• Annual escalator: These are common in lease and PPA agreements; if included, your leasing company will increase your monthly payment (for a lease) or rate per kWh (for a PPA) each year.

• Term length: Residential solar leases are usually for 20 to 25 years. Commercial solar leases can be customized and generally range from 7 to 20 years.

• Performance & maintenance: The leasing company will monitor the system's performance to ensure that it is operating correctly for the duration of the lease. They are also responsible for maintaining and repairing it (but for what it's worth, solar panels require little to no maintenance over their lifetime.)

• Monitoring: Most solar leasing companies offer free online, smartphone, or tablet programs to track your solar panel system's performance.

• Buying the system: Many solar leases allow you to buy out your solar panel system during the lease, typically at a price defined in your contract or its fair market value, whichever is higher.

• Selling your home: If you sell your property, you can transfer the remainder of your lease to the homebuyer or buy the system from your leasing company and include it in the sale of your property. Your potential homebuyer will likely have to go through some form of credit check, but generally speaking, if they can obtain a mortgage, they'll pass the credit requirements for your solar lease.

• At the end of the term: When your agreement ends, you can either buy the system outright, have the leasing company remove it, or leave it in place and renew the agreement with the owner.

Should you sign a solar lease or PPA?

In most cases, you'll be better off signing a solar loan instead of a lease or PPA. You'll actually own your solar panels, meaning you'll be able to take advantage of the best solar incentives like the federal tax credit. 

Solar loans are available in every state and translate to much higher long-term savings compared to leases and PPAs. Some even require $0 down, so you can start saving on day one.