Pre-Paid Agreements (PPA) vs. Buying a System?

[JBinCBad]

I've been getting quotes for 4.5kW systems for the past month or so, and I had dinner with some friends last night that were adamant that the Pre-Paid Agreement was a much better option. A quick search on this forum didn't show any evaluation/comparisons.

Their primary argument is that they have paid .07/watt for 20 years, the system has been installed, and they feel that there is minimal risk, since the install co. must maintain the system, and guarantees enough electricity. They did a rather substantial system (7.5 kW, 27 panels) and are guaranteed no electrical bill. They also think that after the 20 yr lease, it won't be worth it for the install co. to remove the panels, and they will likely just leave them. Speculation of course, but I'm interested in hearing what the minds here think. The install co. they went with has 3 generations as a general electrical contractor, so they felt comfortable they'd be around to maintain the system.

Thoughts?

[J.P.M.]

I've been getting quotes for 4.5kW systems for the past month or so, and I had dinner with some friends last night that were adamant that the Pre-Paid Agreement was a much better option. A quick search on this forum didn't show any evaluation/comparisons.

Their primary argument is that they have paid .07/watt for 20 years, the system has been installed, and they feel that there is minimal risk, since the install co. must maintain the system, and guarantees enough electricity. They did a rather substantial system (7.5 kW, 27 panels) and are guaranteed no electrical bill. They also think that after the 20 yr lease, it won't be worth it for the install co. to remove the panels, and they will likely just leave them. Speculation of course, but I'm interested in hearing what the minds here think. The install co. they went with has 3 generations as a general electrical contractor, so they felt comfortable they'd be around to maintain the system.

Thoughts?

For starters, I'd wonder how they are guaranteed no electric bill. Suppose their use doubled ?

I'm not a big fan of leases, but what you describe is similar to what I hear a lot of from folks who usually, IMO only, knee jerked a response to a self inflicted high electric bill, then succumb to the lure of what seem to be a deal involving payments that are less than the bill they get now, and then parrot what the peddler fed them. Sometimes those folks understand what they did. Sometimes, a lease makes sense. Most of the time, at least for most of the folks I talk to, and still IMO only, their solar ignorance makes them clueless marks for peddlers. But, pay your money, take your choice.

The vendor, while reputable, makes money by putting product on roofs, not saving customers money. It's just business.

[JBinCBad]

OK, thanks JPM, can you articulate the downsides on leasing? I was previously against leasing vehicles, but then realized I changed cars every 2-5 years, and now enjoy getting the upgrade without the extra tax and time of buying/selling. Since technology is growing so fast in this arena, I figure the latest and greatest systems today will be antiquated in 2-5 years as well, so why not let someone else be saddled with the outdated hardware?

It seems to me the weak areas in a lease are:
1. Home resale, if not pre-paid, it will probably devalue the home (and I'm a realtor too, btw);
2. If the install co. goes out of business, then what? (although I'd end up owning the system anyway?);
3. Not being able to modify the system myself if desired?

Benefits:
1. Someone else maintains system;
2. Cheaper up-front cost;
3. Cost of technological obsolescence borne by someone else;


Obviously this is an over-simplified analysis, and I haven't had the actual proposal prepared for my home, but I'm trying work through this as an option. The consensus on this board seems to be fairly negative against leases, I'm just trying to glean the strongest attacks vs. benefits to make an informed decision.

Cheers,
Joel

[russ]

Your friends listened to and believed all the salesman told them it seems.

1) No one is going to guarantee no electric bill without limits - to do so would be stupid.

2) Sale of the home - if the lease is still an attractive deal it may or may not help.

3) Residual value - I believe there will be a residual value - adequate for the leasing party to off load to a third party specializing in solar PV system removal. To think any commercial party is going to leave money on the table at the end of the lease is a bit stupid.

4) A kW is a kW whether it is made by a gas turbine generator or a whiz bang (what ever that is). Becoming technically obsolete is not really a factor.

[J.P.M.]

OK, thanks JPM, can you articulate the downsides on leasing? I was previously against leasing vehicles, but then realized I changed cars every 2-5 years, and now enjoy getting the upgrade without the extra tax and time of buying/selling. Since technology is growing so fast in this arena, I figure the latest and greatest systems today will be antiquated in 2-5 years as well, so why not let someone else be saddled with the outdated hardware?

It seems to me the weak areas in a lease are:
1. Home resale, if not pre-paid, it will probably devalue the home (and I'm a realtor too, btw);
2. If the install co. goes out of business, then what? (although I'd end up owning the system anyway?);
3. Not being able to modify the system myself if desired?

Benefits:
1. Someone else maintains system;
2. Cheaper up-front cost;
3. Cost of technological obsolescence borne by someone else;


Obviously this is an over-simplified analysis, and I haven't had the actual proposal prepared for my home, but I'm trying work through this as an option. The consensus on this board seems to be fairly negative against leases, I'm just trying to glean the strongest attacks vs. benefits to make an informed decision.

Cheers,
Joel

More later, kind of busy just now. You're in the queue.

[sensij]

There are a lot of ways to looks at this, but for me, the decision came down to what was likely to save me the most (or cost the least) over the period of time that mattered to me. PPA agreements that guarantee $0.07 / kWh over the life of the system do not sound realistic to me. I would not dismiss a PPA agreement out of hand, but I would want to see the actual terms in writing before digging deeper into the pros and cons of lease vs PPA vs purchase. What the salesman says and what is actually written on the contract are not always the same thing.

[Alisobob]

Imagine there are 3 houses for sale on the same street.


1. House has no solar, and a $200 a month power bill. $2400 a year.

2. House has some kind of lease.... PPA... whatever. Bill is cheaper than the power company, but its still a bill, and its tied to some kind of wordy contract you cant back out of... no thanks

3. House has installed, functioning solar, that offsets 95% of the current bill... for the next 20 years. No bill, no contract... no fuss..no muss. The owner does want a small premium for the house because of this.. but its pennies a month added to the house payment. The buyer is all smiles.

Gee, which house are you making a offer on?

A neighbor recently sold his home, with a leased system. He lost prospective buyers because of it. Its a liability, not an asset like a fully owned system is.

Even with a short term turnaround.... I feel owning is still better than leasing.

[DanS26]

I have done lease/buy financial analysis for the past 30 years, everything from golf carts to Citation jets. I always get the same question...which is better...lease or buy. My answer is always the same...it depends.

On the surface, can three parties to an economic transaction benefit greater than two parties to the same economic transaction? Again, it depends on what economic benefits the third party (ie the leasing company) can bring to the transaction. Here are some of the things lessors can do:

1. Access to lower cost of capital. In other words they can borrow money cheaper in the marketplace than you the buyer can and pass the savings on to the lessee.

2. Access to tax credits that are not available to the buyer and again passed on to the lessee.

3. They have a ready market to sell the asset at the end of the lease, thus assuming a greater salvage value than the lessee could obtain.

4. They are getting discounts or kickbacks from the seller that they are willing to pass along to the lessee.

Those are just the major items, there are more.

So what do you do to make a good lease buy decision? It's really somewhat simple. You take each transaction and compare the annual cash flows and then present value those cash flows into today's dollars. The hard part is determining the cash flows because you have to make future economic assumptions. Interest rates, salvage value, maintenance costs, etc.

Yes it takes some time, but it is better than a salesman's pitch.

[prhamilton]

I am not sure if you are using the terms correctly. A PPA typically refers to a Power Purchase Agreement which is a lease where the monthly payments are tied to the amount of electricity generated by the system. With a PPA you are obligated to purchase all the power off the systems for a determined price. PPA often have escalators in the price so the price increase each year by 2% or 3%. In general PPA are a bad idea because with all the variables in the agreement, the salesmen have lots of ways to hide profit from you. When you present value the lease payments you will find that you are paying an effective 12-18% interest rate to finance the system. It would probably be cheaper to buy the solar system with your credit card and pay it off over 20 years(please don't do this).

A standard lease is a little more simple, fixed payments over a fixed term. It is a lot easier to present value these leases. When you do the math you typically find that you are paying 7%-10% to finance the purchase. That's not a bad deal considering you are putting very little money down. But you are effectively paying interest on the purchase and that might not make a ton of financial sense. A power company would never finance a new power plant at 10%.

Finally the pre-paid lease takes the financing cost out of the equation. It is very similar to purchasing a system. The only reason these exist is because there is a tax benefit to leasing over purchasing. The IRS allows the lessor to depreciate the system over 5 years instead over the lifetime of the lease. This generates a tax benefit to the lessor of about 5k on a 30k system. This tax benefit is in addition to all the other standard tax benefits.

The tax benefit goes to the lessor, so how much of a benefit you actually see varies. I've seen instances where they actually charge more for a pre-paid leases because they 'maintaining' the system. It comes down to what you value the maintenance. If you asked me what I would pay for that 'service' it would be less than $1000.

The question of what happens at the end of the lease has been argued to death on this site. Only thing really of value are the panels and they represent less than 25% of the total system cost. Racking, inverter and wiring are scrap. Installation cost is sunk, 0. At most the day after you buy a 30k system it is worth 10k.

Cost of the system is largely installation, who is going to install 20 year old panels? Maybe there is some salvage/recycle value to them. It's all a guessing game and you will have to think it through yourself. I totally get a logic that if the panels have the ability to generate power then they have value but they will be nearing their expected life time of 25-30 years. Removing, transporting and reinstalling are non-trivial costs.

Selling a house is an issue and probably the biggest issue of leases. Pre-paid leases are the easiest to deal with, they will let you (after the 5 year depreciation) ask for the system to be removed. During the 5 year depreciation period it is more difficult and requires some sort of buy-out. So if I were a buyer I would love it, I can try out the solar if its nothing but problems then worst case call them up and have it removed.

[DanS26]

Ignore the terms, ignore the hype, it all comes down to the present value of these economic structures. Determine your time frame...take X Y Z scenarios and determine which economic approach will return the greatest benefit.

If you don't have the money up front, then you have to borrow or lease to your detriment in most cases. The American way...go into debt. Don't get me wrong, I am not against leveraging....but you need to do it with your eyes wide open.

[JBinCBad]

Thanks guys for the well-reasoned responses. All have some merit, all have some opinions mixed with fact, and I respect that as well. Gives me a lot to chew on. I appreciate your time and thoughts,

Joel

[subdriver97]

OK, thanks JPM, can you articulate the downsides on leasing? I was previously against leasing vehicles, but then realized I changed cars every 2-5 years, and now enjoy getting the upgrade without the extra tax and time of buying/selling. Since technology is growing so fast in this arena, I figure the latest and greatest systems today will be antiquated in 2-5 years as well, so why not let someone else be saddled with the outdated hardware?

It seems to me the weak areas in a lease are:
1. Home resale, if not pre-paid, it will probably devalue the home (and I'm a realtor too, btw); Why would it be a bad thing to purchase a home that has lower electricity cost than a non-PPA solar home?
2. If the install co. goes out of business, then what? (although I'd end up owning the system anyway?); Interesting, I hadn't even considered this possibility... but why would it go out of business if still have live PPAs bringing in cash?
3. Not being able to modify the system myself if desired? If you mean expansion, I'm sure the PPA company is more than happy to sell you more... but you might not have as much flexibility as if you 100% owned it.

Benefits:
1. Someone else maintains system; Maintenance is minimal on the panels, String Inverters will need to be replaced when they reach End of Life, 10-15 years?
2. Cheaper up-front cost; Flip-side -> More expensive, way more expensive over time...
3. Cost of technological obsolescence borne by someone else; Not really valid, I seriously doubt there is a scenario where upgrading the technology would be cost effective for the PPA vendor.

Obviously this is an over-simplified analysis, and I haven't had the actual proposal prepared for my home, but I'm trying work through this as an option. The consensus on this board seems to be fairly negative against leases, I'm just trying to glean the strongest attacks vs. benefits to make an informed decision.

Cheers,
Joel

There's a lot to consider in this question. But if you have the money to buy the system upfront, then once the system pays for itself (energy production = the cost of what you would have had to pay the utility company) then you're in the black and you're pocketing the money that would shave otherwise continued to go to the utility company. If you go PPA then you continue to pay the PPA vendor... it will be better than being slaved to the utility company and at their mercy with regard to price increases... but if your intention is to save as much money as possible, then a solar lease is going to lose to an outright purchase every time (same for a solar system purchased on a loan).