Free Solar Panels: Are PPAs Too Good to Be True?
Estimated reading time: 7 minutes
Humans love the word “free.”
Can you get solar panels for free? Some companies may offer you a Solar Power Purchase Agreement (or PPA) as a free way to get panels on your roof, but it is important to understand the price of "free."
It’s a simple word, but it’s one almost always paired with eye-catching colors and bold fonts.
It’s the word that drives your friend to repeatedly tag you in social media giveaway posts. It’s the word that motivates eager consumers to wait in lines that extend for miles.
And sometimes, “free” even pushes us to spend more money.
Maybe it seems ridiculous or even unlikely that someone would ultimately sacrifice more to simply get something for “free"—but maybe you're underestimating the power of “free.”
What is the Price of "Free"?
Behavioral economist Dan Ariely wrote about a study in which researchers offered participants their choice of a “free” $10 gift card or a $20 gift card that cost $7. Even though the second option was ultimately the more profitable, the majority of participants chose the $10 gift card because it was “free” and required zero payment.
With solar panels, you’re looking at financial choices that are on a much larger scale than $10 vs. $13. However, consumers in the market for solar are still making illogical decisions because of the high value we naturally assign to anything that is “free.”
Solar companies understand this word’s attraction and often use it to their advantage. Here, we’re going to explore a “free” offer made by many solar companies—a PPA.
What is a Solar Power Purchase Agreement (PPA)?
PPAs, or Solar Power Purchase Agreements, are presented as “free” solar options. A PPA is a financial agreement between a solar company and client in which the client doesn’t pay for solar panels’ design, permitting, financing, and installation.
Unfortunately, like most free offers, there’s more to it than initially meets the eye.
When you directly pay for your own solar panels or take out a loan, your utility bill goes down since your home uses the electricity the panels produce. When the panels produce energy that is not used, that energy is sent to your utility company, and you can receive a credit to use electricity during the times your panels are not producing.
With a PPA, however, you do not own the panels on your house, so you have to pay for the energy produced by the panels that you use. While the solar company will sell you the electricity produced at a lower rate than what the utility company would offer you, you are going to receive two electricity bills a month: one from your utility company and one from your solar company.
So far, a PPA probably sounds very similar to a solar lease, but the difference is that with a lease, it is as though the customer is renting the entire system instead of paying the solar company based on the electricity they use.
A PPA Scenario
Imagine that you pay your local utility company $0.14/kWh. Then, a solar company offers you PPA where you would pay $0.11/kWh for the solar energy that you use.
Right away, you can see a drop in your utility bill. You are paying $0.03 less per kWh, so if you produce and use 1,000 kWh in a month, you end up paying a bill of $110 rather than $140. This seems pretty exciting since you didn’t have to pay to get the panels up on your house in the first place.
However, it is important to look past the first few months of slightly lower electricity bills.
Next, we’re going to highlight some of the primary downsides of PPA contracts so that you can fully understand why Project Solar doesn't offer PPAs and what an agreement entails if you are offered one.
These downsides include
2. Restrictive 25-year contracts
3. No federal tax incentives for going solar
What Rates do PPAs Offer?
First, let’s look back to the previous example and evaluate how the solar company determined that you would need to pay $0.11/kWh. If you look at a company’s website or ask a salesperson, you won't be able to receive specific rates without a company looking at what you are already paying for utilities.
(Note: $0.11/kWh would be a generous rate. Most PPAs offer roughly 10-20 percent off your electricity bill costs, so depending on your current utility rates, you could be paying over $0.15/kWh. PPAs are a bit of a rip-off when compared to the $0.03-0.04/kWh you could pay by owning your own system. See “The Security of Project Solar” below for a detailed example.)
After a company knows what you are currently spending, they can simply offer you a lower rate—whether that’s the best price they can offer you or not. Although PPAs often claim to have a fixed rate, most solar PPA agreements also include a predetermined price escalator, which means that every year, the amount you pay for solar energy can gradually increase.
PPAs' Restrictive Contracts
PPA contracts typically last 10 to 25 years. If a contract that lasts a quarter of a century makes you a bit uneasy, you're not alone.
For example, within those 25 years, how likely is it that you’ll move?
When you consider that the average American moves every 5 to 7 years, it seems not only possible, but probable.
However, if you’ve entered into a 25-year PPA contract with a solar company and want to move, things can get messy. Unless you can convince your buyer to take on your contract, breaking your contract can entail paying a fee and going through the ordeal of getting the company’s panels off your house.
If you stay in the same home and are able to successfully make it through your contract, you can choose to renew, to remove, or to purchase the system. Unfortunately, if you opt to purchase the system at the end of your contract, it would have certainly been more cost effective to purchase the system originally.
No Federal Tax Incentives
Solar's recent popularity and affordability can be partially attributed to the federal and state tax incentives that provide solar installers with a substantial credit.
However, with a PPA, you are the host rather than the owner of the panels. This means that the credit is given to the solar company rather than to you.
The ITC (the federal solar tax credit) matches 30% of what you pay to go solar, so it is important to consider how various credits would help alleviate your solar costs before you turn to a PPA.
Solar has a fabulous ROI, but it is minimized when you are stuck to paying a solar company for the energy you use. Purchasing solar is a serious investment, and if it seems like a financial burden, a PPA may only be a quick fix while paying for your own system or taking out a loan could be more profitable in the long run.
When a PPA Makes Sense
In most cases, a PPA does not make financial sense for the solar customer. However, here are some situations that would change this:
- If you are not eligible for the federal tax credit, then you aren't losing anything with the PPA, and paying for solar out of pocket would be significantly more expensive.
- If you have a low or fixed income or do not qualify for a solar loan, then your purchasing options are more limited and a PPA could be your best bet if you would still like to benefit from solar energy.
If you decide that a PPA is the best option for you, keep in mind that PPAs and other solar leases are prohibited in some states. Here is a list of companies that provide PPAs and a map of the states that either allow or prohibit these agreements.
The Security of Project Solar
Perhaps the cost of buying a solar system is pushing you towards choosing a PPA, but it's important to recognize that not all solar companies are priced the same. Here at Project Solar, we are making solar more accessible than ever with our transparent prices.
A 10 kW system from Project Solar with full-service installation would cost $16,100, after incentives. It will produce approximately 48 kWh a day. If you multiply this by 365 (days in a year) and then by 25 (years of the warranty period) and factor in an average of 92.5% for degradation, you would have 48*365*25*.925 = 405,150 kWh produced.
If you divide the system price by the kWh produced, you would have a total cost of 3.9 cents per kWh.
Project Solar customers average $0.13/kWh from their utility company before going solar. A solar system pays for itself 3.3 times over a 25-year period. AND it should keep producing for many years after that.
The True Price of "Free"
Here at Project Solar, we care about the big picture. And not just our big picture, we care about yours.
We know that a PPA may seem like a safer investment or even a steal at first, but in most cases, the agreement is going to take away the potential ROI you could rack up by paying for your system with cash or through a loan.
Like most people, you probably perk up and pay attention when people start throwing around offers that allegedly come at zero cost. While there’s nothing wrong with being interested in something “free,” the word should also remind you to determine the true price of “free.”