Leasing and PPA
Pulling back the curtains on Solar Ownership options
Ray Kroc, the genius behind McDonald’s, once told a class of graduates that he was not in the restaurant business at all; he was in the real estate business. Many believe this is what led to McDonald’s enormous success – understanding the nuances behind their business.
With that in mind, we at 1 Solar Solution know that we are just as much in the financing business as we are the solar business. The solar industry has seen an extreme boom in the last several years and partly due to the easier access to financing and the varying financing models. There are three models in particular, but in our expert yet humble opinion, only one is truly beneficial to the end customer; that will have to wait for another blog post. Let’s start with the first two.
The Lease Option
Leases generally run for five years with an option to buy at the end of five years. Generally, the consumer pays nothing out of pocket, which minimizes risk for them, and the panels go up. The system is still owned by the company, so the company handles anything that goes wrong with the installation. If an inverter breaks, they replace it; if a panel malfunctions, they replace it. Furthermore, they take care of all maintenance of the system. Great, right?
The Power Purchase Agreement (PPA) Option
The PPA is another available option to many who are considering solar power for their homes or businesses. With PPA, the customer has to agree to purchase power that is generated on top of their roof for a long period of time, generally 20 years. The rates are pre-decided at somewhere between 8 and 13 cents per kilowatt hour (c/kWh) in Texas. It comes with the same peace of mind as leasing; you don’t own the system; thus you do not have to worry about maintenance or malfunction.
Most people buy electricity anyway, so why not pay a little more a month to go green? After all, even if you don’t do solar today, you are going to have an electric bill 20 years from now regardless.
So, these first two plans are very attractive on the surface, and if I didn’t know better, I might want to opt for one of those anyway. No out of pocket cost? Check. Worry free maintenance and management? Check. No risk on my end? Check.
So, what’s the catch?
We all know that consumers don’t like risk, but if there is anyone that hates risk more, it’s corporations. Even when you buy insurance, there is an actuary who sits behind a desk, calculates the odds and cost of you getting in a wreck, adds a profit and sells it to you – simple math. So, why would solar companies be willing to take on the risk of doing maintenance on panels, financing and so many others? Is it because they have a nobler, higher cause to help mend climate change?
The truth: there is very little risk and a lot of reward for the companies.
With a solar system, there are no moving parts, nothing to oil and nothing to maintain at all. So, no maintenance. In the scenario that something goes wrong with your equipment, most Tier 1 manufacturers provide decade or multi-decade warranties on their products. In a solar system for your home or business, there are really only two major and expensive components aside from labor: panels and the inverter.
Panels come with a minimum 10-year warranty with an additional 25-year production warranty, and most quality inverters come with a minimum 10-year warranty with the option to purchase another 5 or 10 years for a few hundred dollars. In that same warranty, they also pay for labor to come replace the faulty equipment. That means the company leasing or selling you a PPA is covered 100 percent if the equipment malfunctions at all.
What about hail? After all, we get a lot of it in North Texas. These first two plans would do well in protecting me and my solar installation in case of a major hail storm, right? Again, let’s talk details. Panels are very sturdy, and if you’ve stopped by one of our booths, you’ve probably seen one. Most Tier 1 panels are lab tested to withstand one-inch hail coming down at 60 miles per hour at a 90-degree angle. Since panels are never installed flat, hail would have to come down faster than 60 miles per hour or be larger than one inch to do any damage. If you can imagine that kind of hail, can you imagine what it would do to roof shingles? Would you need your roof replaced? In the spring of 2016, we had a significant amount of hail in North Texas and a handful of customers who needed their roofs replaced, but not a single panel was damaged.
If your panels are damaged, they are covered under your homeowner’s insurance policy just like a sun room would be. In the past, even in the cases where the roof needed to be replaced, the home owner’s insurance company paid us to uninstall, test and reinstall the panels after the new roof. So, in case of hail or major storms, what is the company’s exposure to risk? Zero. Because insurance covers it all.
In our next post, we take a look at some benefits to the company for taking on ALL (zero) risk on the consumer’s behalf, and be sure to tune back in for our third post entitled “Being Smart with Solar: the best way to finance solar.???