Power Purchase Agreement: The Best Option When Switching to a Solar Powered Lifestyle
Today, I want to address something very controversial in the solar world. Especially for those who think buying is always better than a PPA, which is a power purchase agreement or a lease.
I’m just going to start by saying it’s not. Hear me out.
We talk to hundreds of homeowners. Not just in this area (San Marcos, CA) but all over NorCal and several other states as well.
The one common thing that we see and hear every single time is, “What should I do? Should I do a loan? How much money do I have to have upfront?”
There are a lot of assumptions that are happening with solar right now because the market, us, as homeowners are uneducated about it. It’s still new enough that we’re not sure if we’ll even save money. We’re not sure if we need money upfront. And if we do go with a loan, how much is that, and what should you expect? Will it hurt your credit? How does it work? What credit score do you need? If you go with a power purchase agreement, then how does that look? What’s different about those?
If you’re reading this right now and you’re wondering, what in the hell is a power purchase agreement, then you see what I mean, right? There are options.
What are the options?
One option is owning, and the other option is a power purchase agreement.
There is a lease option, so technically, there are three options, but a lease and power purchase agreement are very similar.
If you’re looking at a power purchase agreement or a lease power purchase agreement, we always recommend the power purchase agreement 99% of the time.
Power Purchase Agreement vs. Owning
Let’s compare a power purchase agreement versus owning solar.
You could buy it outright to own it.
Let’s say the average system paid with cash is $25,000. We’ll use this amount for our example.
You can also get a loan. But then there’s an upfront cost, then interest on top of the payment. Then you’re responsible for maintaining the system, blah, blah, blah. That’s annoying and a lot of money and effort just to have solar on your roof.
Then there’s the Power Purchase Agreement (PPA). There are no upfront costs, the bill gets reduced up to 60%, the maintenance is taken care of for you, and there are many more advantages. I’ll talk more about this later.
Remember what I said in the very beginning about how there’s so much controversy on this? Here’s why.
People have different attitudes. Some people think this: “If I own my home, then I have to own the solar on the home, too. Why wouldn’t I?”
Why would I ever pay for the power of the sun?
If you think that just putting panels on your roof and owning the power from the sun coming down and charging your house is the best use of your money, then you are naive. You don’t understand solar loans. You could use that money for other things.
I know there are plenty of people that might be reading this that understand the financial return and the ROI on owning solar over 30 years.
The key here is that’s if you were in the home for 30 years. That’s if that calculation you made turned into an actual investment. That’s what I want to debunk right now.
What happens if you sell your home?
Owning solar does not guarantee you’ll get your return on your investment, nor does it mean that was your best use of your money, because again, in the example, we’re using $25,000 as the amount here to own solar.
There are other ways to invest that $25,000. There might be a safer investment to go with that would work for you, where you’re not going to risk losing that money.
You might be asking, “How do I lose money if I put it into solar? I own the panels. All I got to do is pump out the power until it pays off.” Well, here’s why.
Say you own the solar, and you decide to sell your home. They say it increases your home by X percent, but it doesn’t mean it’s going to happen for you.
I believe it does increase your home value. I’m not arguing that. I’m claiming that your home may not be sold for more or an extra $25,000 more just because you have solar on your home.
There’s a higher risk that you may not get your money back at all.
Luke sold his home after investing $60,000 in solar!
Let me tell you a story.
I know a guy named Luke very well who is an investor in real estate. He’s also an investor in a solar. He bought $60,000 worth of solar and put it on what he thought was going to be his forever home.
That’s important to note here. Luke thought he was going to live in his home forever or at least a very long time. He put 60 grand down, which means he’s pumping out a whole lot of energy and has a lot of panels on that home. A year and a half later, he ended up having to sell that home and lost money on solar. And no, it did not get him 60k more on his house.
He could’ve invested that $60,000 elsewhere.
You can argue every point you want that he could have done this or that. But that’s because you didn’t know the future. You know now in hindsight, but nobody knows that about investing in anything, whether it’s in the stock market, real estate, or anything else.
A Power Purchase Agreement has less risk involved.
With a loan, when you invest that money, realize that’s an investment mindset, not “I want to save on my power bill mindset.” I’m not saying you shouldn’t buy or invest in solar. You could get a high ROI; it’s just hard to. It’s no different from investing in stocks. There are safer stocks where you can get your return if you just stick with it and be patient, but if you jump out early (like moving from your home sooner than you think), you lose all your money.
Listen, no matter how old any of us are, there’s no guarantee we’ll stay in that house. All kinds of things could happen with your health, your spouse’s health, or even your children. You might have to move across the country or the world. You can’t promise yourself that you’re not going to move.
So, if you put up 60 grand like Luke or 25 grand like our example, and think you’re safe, that’s not the case, it’s still a risk.
Cash or loan options have higher risks.
If you’re going to own with cash or a loan on solar, you are taking a risk. And it might be a reasonable risk to take. But it is not 100% the number one way to go.
By the way, if you disagree with me, tell me. But I don’t care if you disagree with me.
I know because I see the results. We market and sell and help homeowners make that transition from traditional power to solar power. And we see their financial circumstances. We can see what they’re doing, what’s happening, and we see the patterns, and we know where things are going. My opinion that cash or loans have a higher risk compared to a PPA is not a blanket statement. I’ve seen what can happen. What I see are patterns of what people want.
A Power Purchase Agreement means you don’t own any part of the solar system.
Here’s what people are wanting. If you’re going to be an investor and be smart, a power purchase agreement is this: you don’t own the panels or any part of the system of solar.
You simply purchase the power that’s generated from that system. The agreement is that they get to use your roof. It’s called a ground mount, and it’s on your property.
Let’s say you could have bought $25,000 worth of panels or in cash or a loan and put it up there, not just panels, but the whole system to have it operating. Before you purchase that, you could just buy the power from the panels, if they’re willing to give you everything up front.
There are zero upfront costs!
The next question is, what is a PPA? A power purchase agreement is after you have it on your roof, if you have a credit score of 650 or more, you are going to be approved automatically within seconds to have them put that on your home for zero upfront cost. And the key here is that you’re not even necessarily financing that. It’s like a loan.
You’re saying they can put all of that on your roof and are agreeing to switch your utility bill.
Down here where we’re at, it’s San Diego Gas Electric, SDGE, or if you’re in NorCal, PG&E, and those guys charge a lot on average.
There are all these different tiered rates, and most everyone will end up switched over, or maybe you’ve already switched over to a different rate system. The time of use, right? That’s an entirely different topic for another day, but the key here is to understand this. When you’re getting charged by those guys, the traditional power companies, it’s varying, but there’s an average.
Our average clients pay around 25 to 30 cents per kilowatt-hour used. Out of that 25 to 30 cents, all you’ve got to do is do the math. You just calculate the number of kilowatt-hours you use and multiply that by 25 cents. That’s pretty low. It’s usually about 28 to 30 cents, but we’re going to go low for the sake of this example.
Which one would you do?
When you have a power purchase agreement, you don’t pay anything, nothing upfront. You just pay your first power bill, and we’ll charge you 19 cents, 18 cents, whatever the cents are. Over time, that’s hundreds of dollars a month, depending on the amount of your power bill. Usually, it’s at least 20% and goes up to 60%. We’ve even seen 70% in savings per month with zero upfront costs.
Now compare that to a loan like Luke’s case with 60 grand thinking he’s got his forever home with an excellent investment and going to save all this money on his power, but he loses money. Or best-case scenario, let’s say he broke even. I know he didn’t because I know him, but let’s say he did. Well, he didn’t make any money at all and didn’t even get to use that 60 grand towards something that could have made money. He had to tie up 60 grand into something, a risk. Or he could have done a power purchase agreement, paid nothing upfront, and cut his bill in half. Which one would you do?
Don’t be an idiot.
What I’m challenging here is the marketplace thinking they have to own. It is ridiculous to think that’s the only way to go.
So many people comment on our posts saying never to do a PPA or a lease, always do a loan. That’s a big blanket statement for you thinking you’re smarter than everybody else. You’re not. If you’re reading this and you’re that person, you’re a dork for thinking everybody should own. Probably more like an idiot.
Seriously, you’ve got to stop telling people that when you don’t even know their circumstances. They could cut their bill in half with a power purchase agreement.
Don't trick yourself into thinking you have to own or buy!
Let’s say someone has a $400 bill, which is very realistic here in our area. I can almost guarantee you that we could cut that bill in half to around a $200-ish payment with zero upfront costs as long as their credit score was 650 or above.
It’s like me saying, why don’t we just switch you over to Verizon from Sprint and I’ll cut your bill in half. That’s all that’s being done here with a power purchase agreement.
Of course, the agreement and the contract you’re signing is different than it is signing with Verizon or Sprint, but I’m talking about the concept of what you’re doing. You’re switching utilities with a power purchase agreement. You’re doing nothing more.
Don’t trick yourself into thinking you have to own or buy or do anything where you’re doing cash or loan. That’s not the only option. I’m here to tell you a power purchase agreement just might be the best option.
Look into the marketplace!
One more thing, if you’re a good investor and you think owning is good, why don’t you look at the marketplace and what they’re telling you. Have you ever thought about that? What does the market place want? Do they all want to have a 25 grand loan on their credit or come up with 25 grand? And hopefully, not move?
Especially if you’re 50 years old or younger, Buddy or gal, you’re moving.
The average American moves every six years. I could be off a year or two, but I don’t care. You get what I’m saying. It’s not that long before we move again—the market place moves.
To think that you’re going to be in that home and get your ROI guaranteed? I don’t think so. You have a high risk that you’re not going to.
Lower your power bill with a Power Purchase Agreement.
A power purchase agreement, on the other hand, at least you can just get a lower utility bill. You can cut your bill in half almost instantly. Meaning after it’s installed and turned on, which usually takes about 30-ish days, you’ll have a new statement from a new company that has a way lower rate because they’re using solar to power your home and your lifestyle. That’s a much better thing.
The marketplace is saying they want a lower bill. They’re not saying they’d like to own solar.
There’s a small amount of the marketplace that thinks owning and investing in solar is a great idea, but if you are investing in the concept of what approach is going to win, I want you to come and challenge me on this in 10 years and tell me you told me so. You won’t win.
People want to lower their power bills; they don’t want to own a solar panel on their roof.