Leasing Solar

Lease. Leasing a solar electricity system is just like leasing a car. You pay monthly to use it over a specified period of time. You enjoy the benefit of electricity produced by the system. Ideally, you would pay less for the energy produced by the system over the term of the lease than you would have paid for the same amount of energy from SMUD.

PPAs. PPAs are similar to leases because the business owner pays for the energy produced by the system, but not for the system itself. But whereas lease payments are about the same every month, PPAs vary each month based on the amount of energy produced by the system. And that is related to the amount of sunlight available. Under a PPA, a customer pays for only what is produced during a given month, and will therefore pay more in summer than in winter.

What should you expect from a leasing/PPA agreement?

A lease or PPA agreement should:

  • Guarantee the amount of energy that will be delivered per year, and over the life of the contract, in exchange for the lease payment or PPA price. Since the amount of electricity a solar electricity system generates declines gradually over time, the power guarantee should take this into account.
  • Specify that the vendor will operate, maintain, and repair the system in a way that ensures that you get the energy yield promised over the life of the contract.
  • Provide a clear statement of what you will pay per kWh produced by the system. A PPA agreement will state the amount but the number needs to be calculated for leased systems.
  • Estimate the value of net metering at your current level of electric use. 
  • Specify the process and costs of removing the system and restoring your roof when the contract terminates. 
  • Specify what you will be required to pay if you move or decide to remove the system prior to termination of the contract.

Choosing a vendor

Look for:

  • At least two years of installation experience
  • A current C-10 or C-46 contractor license, or a B license if accompanied by additional solar certifications
  • Certification from the North American Board of Certified Energy Practitioners (NABCEP)
  • Customer references

For your own peace of mind, it is always best to get more than one bid. Select your contractor not only on price, but also on their experience and expertise. System prices can vary in a wide range.

Consider, too, who will own the system if the solar vendor ceases operations. In most cases, ownership would be assumed by one or more financial institutions that capitalized the business and the lease or PPA contract would most likely remain in effect. System removal and roof restoration can be costly, so the owner of the system would have an incentive to keep it operating.

Cost-benefit analysis: Leasing vs. owning

If ownership of a solar electricity system is not attractive, given your circumstances, your cost-benefit analysis will be between the cost of electricity from a leased system or PPA vs. the cost of the same amount of electricity from SMUD.

If you are considering ownership, you may want to compare ownership costs to a lease or PPA. Calculations vary, but some generalizations are possible.

If you buy a system, either with cash or financing, the average cost of energy produced by the system will decline steadily the longer you operate it. This is because the initial investment will be spread over an ever increasing amount of energy produced. It will take years for the average cost of energy produced by the system to fall to the same level you would pay from the start of a lease or PPA. But when you own a system, you would eventually reach a break-even point after which your return on investment would be greater than with a leased system or PPA.

Factors to consider in your analysis include:

  • How long you intend to be in your current location and the corresponding benefit from the system 
  • Total costs of ownership, including finance costs
  • Financial risks of premature termination of the lease or PPA agreement
  • The value of purchasing a third-party-owned system at the end of the lease or PPA agreement

What is SMUD’s role in any lease or PPA transaction?

SMUD’s solar incentive program includes several protections for the customer. For example, solar vendors must guarantee that any system receiving SMUD incentives will yield at least 80% of its projected output for at least 20 years. See SMUD’s PV Program Handbook for information on system quality and solar business requirements.

SMUD also protects the interest of all its customers, who collectively contribute to SMUD’s solar incentive program. Solar equipment for which SMUD incentives are paid must remain in place for the duration of its useful life. If the home is sold and the system removed, the system must be reinstalled within SMUD’s service area within six months or SMUD will seek to recover any unrealized portion of the incentive payment