Solar Tax Credits, Rebates, Loans, Leasing & PPA's

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Power Purchasing Agreement (PPA)

In a lean economy, high upfront installation costs have deterred many, if not most homeowners from going solar, even though the idea appeals to them. In 2007, the Power Purchasing Agreement (PPA) was introduced in California, which added third-party financing as an option. Several states now allow PPA's for residential PV systems, but most of the action remains in California. In 2011, more homeowners in that state chose PPA's or leases over purchasing the system themselves.

In essence, when you sign a PPA, you allow a solar company or third party to become your solar power utility. This means you'll be paying two utility bills each month instead of one. There are many different versions of the contract, so the devil is in the details. For instance, if you make a large down payment on your future monthly bills, you may get a lower rate charged per kilowatt hour.
This guide, which targets businesses and organizations, provides information about PPA's that homeowners may also find helpful. It's available free here.

The downside of a PPA is that you don't get to take advantage of any tax credits or other incentives, including the 30% federal tax credit. Instead, the PPA sponsor gets to cash in on those perks, as well as other tax breaks that may be offered by state and local governments to encourage renewable power. And since you don't own the system, any repairs or maintenance are out of your control.

The contract technically requires that solar energy be deilvered, but naturally there's leeway to accommodate the logistics of dispatching a service truck or handling parts replacement if that system goes down. (You shouldn't have any bill to pay, of course, when the solar array is offline.) Whether or not the PPA provider will have as fast a response as your grid utility company remains to be seen. Oftentimes, the solar company that performed the installation will be responsible for repair and maintenance.

On the upside, you won't shoulder any of the costs for insuring or repairing the equipment yourself. And you don't need to pay much, if anything, to have the system installed. A PPA locks in a set kilowatt hour rate for the life of the contract, typically starting out low and increasing over time. PPA providers insist their rate increases will ultimately be lower than grid utilities. Unless they have a crystal ball, you can't really take their word on future utility rate projects. Besides that, any utility increases in flat fees have no bearing on kilowatt hour generation. All homeowners tied to the grid must pay the same flat fees, regardless of power consumption.

The biggest sticking point for signing a PPA lies in the prospect of an unforseen need to terminate the contract early. Since the average term is 20 years, what happens if you decide to move before that? A PPA may offer a buyout plan, which means paying a lump sum roughly equal to what the PPA handler expects to make in the time left on the contract. Then you'll own the equipment and can try to sell it with the house.

Alternatively, you may have to find a home buyer willing to take over the PPA for the rest of its term. That could make the home sale more difficult, especially if newer, more efficient solar technology gets developed between now and then. If the array is ten years old for instance, prospective buyers many not want to buy it. They're also unlikely to take kindly to the higher rates that will be kicking in down the stretch.

As you can see, the no-money down option is not so easy-breezy as salespeople may want you to beleive. Since many solar companies now routinely partner with specific lenders, there seems to be more of a concerted push in the direction of third-party financing. For this reason, beware of sales gimicks or other pressure exerted on you to select a payment option that's not in your best interest. Always take a day or two to read all the fine print carefully. After all, it's not like signing up for cable. With a PPA, you're agreeing to the terms that will last for a decade or two.

For more on how a PPA works, check out this NREL fact sheet (PDF). Beware, it's not light reading... You can also download The Customer's Guide to Solar PPAs (targetted at businesses and organizations), or view the website of one the big players in this industry, SunRun.

Solar Leasing

In some areas of the United States, it's possible to lease a solar power system rather than buy it outright. Under this scenario, the homeowner makes a monthly lease payment while getting a lower monthly utility bill. At the end of the lease period, the homeowner has the opportunity to renew the lease, buy the PV system at its depreciated value, or have it removed.

Solar City, a nationwide home PV installation company, offers several different types of leases to customers, including a lower monthly cost if a down payment is made at the outset. Investment firms and other lenders also sponsor solar leases. Some of the major players in leasing to date include MySolar (Morgan Stanley), SunRun and Sunpower/Sungevity (Citigroup). Unlike a PPA, a solar lease generally involves a set monthly payment for the equipment, rather than paying for the kilowatt hours generated. Yet like a PPA, the third party gets to take advantage of the tax credits and rebates that would otherwise go to the homeowner. All these firms work together with local solar companies to install, monitor and maintain the equipment.

Lease terms usually go for 10, 15 or 20 years. In nearly all cases, the lessor is responsible for maintaining the equipment, including replacement of a central inverter when it's ten-year lifespan is over. The homeowner may be responsible for insuring the equipment. Like PPA's, there are a variety of unpleasant early termination scenarios to ponder. Leases impose obligations on a homeowner that may be difficult to meet if the he or she has to move out. This may include payment of all money still owed on the lease's full term. It's possible, however, to move the equipment to a new home if it's within the same utility district. The cost to diassemble the unit and reinstall it elsewhere will be your responsibility.

To find out more about leasing, the NREL has published an in-depth article (PDF) on the subject. You can also check out this info website that lists states and companies that offer leases.

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