Solar PPA, Lease, or Own: What Each Means

A photovoltaic array on a roof can be paid for in three fundamentally different ways: the building owner buys it outright, a third party owns it and sells the electricity to the building (a power purchase agreement, or PPA), or a third party owns it and leases the equipment to the building (a solar lease). The difference matters far beyond who writes the initial cheque. It determines who receives the tax incentives, how the monthly savings are calculated, what happens if the system underperforms, and what a prospective buyer of the building is actually acquiring.

This page explains the three structures and their consequences. It does not recommend one over another, because the right choice depends on local electricity rates, the condition of the roof, and the length of time the building will be occupied. It also depends on rules set by the state and the utility, which change. Net metering, export compensation, interconnection procedures, and any tax credits or rebates are all jurisdiction-specific. Check the current rules in the relevant state and with the local utility before relying on any of the general statements below.

The Three Structures in Brief

In an ownership arrangement, the building owner pays for the system and receives the electricity it generates. If the system is financed with a loan, the loan payment replaces the electricity bill payment. The owner is entitled to any federal, state, or utility incentives, such as the investment tax credit (ITC), and can sell any excess electricity to the utility under whatever net metering or export rate applies.

In a PPA, a third party installs and owns the system on the building. The building agrees to buy the electricity generated at a set per-kilowatt-hour price, typically lower than the utility’s retail rate. The third party claims the tax incentives and manages operation and maintenance. The building owner sees a lower electricity bill, but does not own the equipment.

In a solar lease, the third party owns the system and leases it to the building for a fixed monthly payment. The building uses the electricity, but the lease payment is not tied to the amount of electricity generated. The third party claims the incentives and is responsible for maintenance.

Who Gets the Incentives and Why That Matters

The federal investment tax credit (ITC) and many state and utility incentives are only available to the owner of the system. In a PPA or lease, the third-party developer owns the system and therefore claims the incentives. This is a major reason why third-party ownership can offer lower upfront costs: the developer passes some of the incentive value to the customer in the form of a lower PPA rate or lease payment.

However, the value of the incentives depends on the developer’s ability to use them. A developer with a large tax appetite can monetize the ITC more efficiently than a small one. The building owner, if they own the system, must have enough tax liability to use the ITC. Tax-exempt entities, such as municipalities or non-profits, cannot use the ITC directly, so they often turn to third-party ownership or a special structure called a “sale-leaseback.”

State and utility incentives vary widely. Some states offer rebates that are paid to the owner, while others offer performance-based incentives based on generation. These incentives can change or expire. Always check the current programs in the state where the building is located.

How Savings Are Calculated

With ownership, the savings are the difference between what the utility would have charged for the electricity the system generates and the cost of the system (loan payments, if any, plus maintenance). The savings are not guaranteed; they depend on the system actually producing as expected and on the utility rate staying the same or rising.

With a PPA, the savings are the difference between the PPA rate and the utility’s retail rate. The PPA rate is usually fixed or escalates at a small percentage each year. The savings are more predictable than ownership, because the PPA rate is known in advance, but they are still subject to the utility rate changing. If the utility rate falls below the PPA rate, the savings disappear.

With a lease, the savings are the difference between the value of the electricity the system generates and the fixed lease payment. The lease payment is the same every month, but the value of the electricity varies with the amount of sun and the utility rate. If the system underperforms, the lease payment still must be paid, so the savings shrink.

What Happens When You Sell the Building

Ownership is the simplest to transfer. The system is part of the property, and the sale includes it. The seller can include the remaining loan balance in the sale price, or pay it off at closing. The buyer inherits a working system and the associated electricity savings.

A PPA or lease is a contract between the building owner and the developer. When the building is sold, the contract must be transferred to the new owner, or the seller must buy out the contract. Many developers require the new owner to qualify for the contract, which can complicate a sale. Some buyers are unwilling to take on a long-term contract, so the seller may have to pay a buyout fee. The terms of the contract specify what happens on sale, and these terms vary.

What People Get Wrong About This

A common mistake is to assume that a PPA and a lease are the same thing. They are not. The key difference is that a PPA charges for electricity generated, while a lease charges a fixed fee for the equipment. This affects how the savings are calculated and what happens if the system underperforms. With a PPA, if the system produces less than expected, the payment is lower, so the savings are partially protected. With a lease, the payment is fixed, so underperformance directly reduces savings.

Another mistake is to compare the PPA rate or lease payment to the current utility bill without considering the escalation. Many contracts have an annual escalation clause that increases the rate or payment by a small percentage. Over a 20-year term, that can add up. Compare the total cost over the term, not just the first year.

A third mistake is to assume that the building owner can buy the system at any time. Most contracts include a buyout option, but the price is often based on a formula that may not be favourable. Read the contract carefully to understand when the buyout is allowed and how the price is calculated.

Finally, some people assume that third-party ownership is always cheaper because it avoids the upfront cost. That is not necessarily true. The developer passes on the cost of capital and the risk of underperformance, so the total cost over the term may be higher than ownership. The choice depends on the specific numbers.

The Role of Local Rules

As mentioned, net metering, export compensation, and incentives are set by state and utility. Some states do not allow third-party ownership at all, which makes PPAs and leases unavailable. Others have net metering that credits excess generation at the retail rate, while others pay a lower wholesale rate. These rules directly affect the economics of all three structures. For example, if net metering is limited, a PPA that exports a lot of electricity may be less attractive. Check the current rules in the state and with the utility before making a decision.

Making the Decision

The decision between owning, leasing, or a PPA depends on several factors: the ability to use tax incentives, the length of time the building will be occupied, the condition of the roof, and the local electricity rates. Ownership is generally the best long-term option for those who can use the incentives and plan to stay in the building. PPAs and leases offer lower upfront costs and shift maintenance responsibility to the developer, but they come with long-term contracts and potential complications on sale.

There is no universal best choice. The right structure is the one that fits the building’s situation and the local rules. Read the contract carefully, understand the escalation clauses and buyout options, and check the current incentives and net metering rules in the state and utility service area.