What does it mean to go solar through third party ownership?
What does it mean to go solar through third party ownership?
Third-party ownership means that a solar company will own and maintain the panels installed on your roof, as well as provide insurance and maintenance for the lifetime of the agreement, normally 25 years. As the homeowner, you simply purchase the energy the panels produce through a power purchase agreement (PPA) or pay a fixed, monthly rate (lease) for your roof space used for the panels. PPAs and leases are like other financing instruments, and generally feature no upfront fees. Typically, the price of solar is lower than your standard electricity price, so you can benefit from monthly savings. A lease or PPA contract typically runs for 15 to 25 years, and may include an option for the homeowner to purchase the system outright later in the contract term. In this third-party ownership model, the company that owns the system will retain the federal tax credit and any other available local incentives and share some of that related savings with the customer.
Benefits of power purchase agreements and leases
- The third-party owner is responsible for repairing or replacing any system components (solar panels, batteries, inverters, etc.) that fail.
- The third-party owner of the system carries insurance that replaces the system if it’s damaged due to natural disaster.
- Third-party ownership models allow individuals and organizations to go solar without any money paid up-front.
- The third-party owner is responsible for maintaining the system for the length of the contract.
- If the homeowner is unable to directly take advantage of federal or state tax credits or other incentives, in this model the third-party owner company takes the incentives and passes some of the incentive-related savings on to the customer, incorporated into the monthly fee.
Considerations for power purchase agreements and leases
- As with any legal document, it’s important to understand key elements and fine print of the agreement before signing it. PPAs and leases have contractual terms of up to 25 years and the homeowner may have responsibilities during that time such as making sure the system stays free from shade.
- Since the third-party owns the system, the individual or business will not be able to directly take advantage of any incentives like the federal tax credit, Solar Renewable Energy Credits (SRECs), or grants.
- Some PPAs may increase the price you pay for the electricity your system produces over the life of the contract. This is known as an escalation rate, or escalator, for short. Escalator rates can vary by contract and provider.
- Third-party ownership is only available in certain states.
Questions to ask about leases and power purchase agreements
- Does the agreement include all the relevant components of the SEIA Transaction Disclosures? (SEIA is the national solar industry association)
- What is the term of the agreement?
- What is the cost of energy ($/kWh) in the agreement or the monthly payment?
- What assumption does the proposal use to project how much my utility electricity costs will go up over time? (The assumption is usually based on 10- or 20-year historic information but can vary by provider and even by proposal. The higher the assumed rate of increase, the better the economics will look in the proposal.)
- Is there an escalator for my monthly payments? In other words, will my monthly payment for the PPA go up during the life of the agreement? If so, by how much and how often? If payment goes up over time, the cost of electricity from your utility must go up at a higher rate than your solar payment for you to save money with the solar system.
- What are my options if I decide to sell my house before the agreement ends? Options typically include: the new owner assumes the contract, you buy out the contract, or the company moves your system to your new home if you are moving nearby and the new home is a good fit for solar.
- What are my options when the agreement ends? Options typically include purchase the system at fair market value, extend the life of your PPA or lease, or have the installer remove the panels from the roof.
- How long are roof penetrations warrantied? [Why this is important: because an installation warranty describes how long an installer’s work is covered against problems encountered due to the act of installing components on the home (e.g., roof leaks). You should determine if your agreement covers that for the entire term or for a shorter period.]
- Will there be a cost to remove and replace the panels [and what is it] if I need a new roof or a roof repair in the future
- Will system components be covered for the life of the term or just for the manufacturer’s warranty length? What additional costs apply if equipment should fail after warranties expire? The industry standard is to cover all maintenance and repairs during the life of the agreement. [Why this is important: because equipment warranties can range from 10 to 25 years. If you have a 20-year term on your agreement but the inverter (for example) is covered for 10 years, what happens in year 11 if it fails? Do you incur additional charges?]
- Is additional insurance coverage provided by the company as part of the agreement?
- Will I still pay monthly for my leased system if the system stops functioning? [Why this is important: if your system has an error and stops producing electricity for a time, you won’t be saving on utility electricity costs during that period. For short periods, that’s okay. For longer periods, you may still be making monthly payments to the company but not receiving the electricity savings benefits.]
- If your system has a battery, how will you benefit, besides continued power during outages? Does the system owner use that battery to provide services to the grid? What percentage of your battery storage will be retained for your use? What compensation will customer receive for services provided by battery to the grid?