The Bright Side of Solar Power Purchase Agreements

I recently signed a Solar Power Purchase Agreement (PPA) and had Ten Photovoltaic (PV) panels installed on the roof of the GubMints Home.

I have been ‘kicking the tires’ of rooftop solar for about 2 years now, soliciting bids once every 6-10 months. Until recently, most of the bids involved an outlay of anywhere from $3,000 to $13,000 and a system payback period of 8-12 years. 8 to 12 years is a long time to wait for something to pay for itself, so I sat ‘on the fence’ with respect to rooftop solar… until now.

Imagine the following scenario:

You get a letter in the mail offering you a check for $11,000. There’s no photo of Ed McMahon (or I guess Andy Richter would be a less arcane reference, but I digress…), and there’s no letter from a Nigerian Prince asking for your bank account routing number.

Would you accept the offer?

Well, that’s the Present Value to you of a Solar Power Purchase Agreement- Monthly savings of $25 (in my case) for 20 years.

Why should I bother with the hassle of something that will only save me $25 a month, you ask?

Well, if you make all of your financial decisions solely based on monthly payment amounts, you’re what the car industry refers to as a (st) sucker ‘Payment Buyer’.

I’m wasting your time and you need to stop reading this post right now. Seriously, go back to binge-viewing your favorite reality-dating-show.

Still with me?  Ok, here’s how a Solar Power Purchase Agreement (PPA) works:

My household only consumes about 8000 kiloWatt-hours (kWh) per year, which is about 20% below the average for Southern California (which runs at an average consumption of about 10,000 kWh per year).

In layman’s terms, a kiloWatt-hour is running your microwave (which consumes about 1 kilowatt of power) for an hour. Other equivalents of about 1 kiloWatt-hour are:

  • Running a Medium-Sized Window AC for an hour
  • Running a Medium-Sized space heater for an hour
  • Running your 42″ LCD TV for FOUR hours.

The GubMints household electric bill runs from $80 – $150 per month, depending on time of year.  Here’s the Game you must play in the design of your Solar PV system:

Most utility companies don’t charge you a ‘flat’ rate for every kWh you consume- instead, it’s like the Federal Tax Code, where the first few kWh you consume in the month are cheap (think of these as the 10% and 15% tax brackets which we’ll call Tier 1 and Tier 2), and then the incremental kWh you consume to run your ‘fat cat’ luxuries like swimming pool pumps, Hot Tub heaters, and dueling multi-zone air conditioners in your McMansion are charged at higher electricity rates (the 25% and 28% tax brackets- which we’ll call Tier 3 and Tier 4).

Here’s an example of the progressive Tiered-rate structure for our local utility (SDG&E):

San Diego Gas & Electric utility Tiered Rate Structure

Tier 1 & 2 energy rates are subsidized by state governments, the federal governments, and heavy consumers of electricity. In some cases, power companies are selling electricity to Tier 1 & 2 customers at prices that are below the utility’s cost. This is because Uncle Sam does not want Grandma to spend her entire Social Security Check on the electricity necessary to run the refrigerator and stove in her one bedroom condo.

…So the goal of this Game is NOT to generate every Watt of power from your roof, the goal is to eliminate your consumption at the more expensive Tiers 3 and 4 by reducing the power you consume from the utility company’s grid and using the solar power instead. This ensures you will only be purchasing electricity from the local utility company at the Dirt Cheap Tier 1 and Tier 2 rates.  In my case, about half of our household power is charged at Tiers 1 & 2, and about half of our power is charged at Tier 3 & 4.

Power Purchase Agreement Payback spreadsheet

[You can download a copy of the spreadsheet here.]

So, in case you haven’t guessed it, the PPA company designed our system to produce only HALF of the energy we consume (on average) each month.  This reduces the household electric bill to Grandma’s Tier 1 & 2 pricing. In exchange, we’ve signed a contract with the PPA company to use them as our ‘secondary’ electric company. The PPA company will charge us 16.4 cents per Kw-H for each unit of electricity ‘sold back’ to the grid/Utility Company.

But here’s the catch – This is not a ‘flat’ lease payment- Our PPA electricity ‘lease’ escalates at 2.9% per year for 20 years.

The marketing materials offered by the PPA company predicted ‘doom and gloom’ with the local power company- predicting future electricity inflation of 5 to 6 percent per year. This made their 2.9% escalating lease look cheap by comparison.

I did some research on my own and found that since 1980, our local utility’s ‘inflation rate’ has been only 2 percent. So I ignored the PPA marketing materials and crunched the numbers using 2% electricity inflation.  Bottom Line: We’ll still be way ahead of the game by at least $3500 in this worst-case scenario.  Note: After inking the PPA contract in March, I had a few moments of ‘Buyer’s Remorse’- Until SDGE announced an electricity rate hike of 12% in 2014! Now we’re WAY ahead of the Game!

Now that you understand how a Solar Power Purchase Agreement works, here are the advantages:

You save money from day one. With no initial investment, your savings start immediately. The typical ‘payback period’ calculation is mathematically ‘not defined’, as the denominator (your cost) is ZERO!

You’ve got no skin in the game! In a PPA, your only investment is the time required to fill out the forms, sign the PPA contract, and stand by during the home inspection and install.

The risk of Operating and Maintaining the system is outsourced to the PPA operator. If something breaks, the PPA operator is on the hook to repair or replace the faulty component at their cost. It’s like having a 20-Year lifetime warranty for your PV system.

Later on, You still have the option to purchase the PV system if you want to. If you like how your system is performing, you can change your mind and buy the system later. In my case, I have the option to purchase the system outright once per year after the 5th year of operation. This is kind of like the option to purchase the car you are leasing once the lease is up (not that I am a big fan of car leases). After the 5th year, I have the option of buying the system for $8,000- about HALF of what the system cost to install new.  The system is projected to produce xx dollars in energy savings from years 6-20, so buying the system for $8,000 is like buying xx dollars in electricity for only 8000 – a yy percent discount.

The PPA is fully transferable. You’re not necessarily stuck with the PPA if you move or sell the house. The PPA is fully transferable to whomever the homeowner is during the 20-year term of the PPA.

Sounds too good to be true, doesn’t it?  What makes this all possible? In a word- GubMints.

You see, the Chinese Government (for whatever reasons) is heavily subsidizing its domestic PV panel manufacturers- to the point that the PV panels on the market today are being sold at less than cost.

Meanwhile, back at Stately Wayne Manor in the United States, Uncle Sugar is heavily subsidizing the costs to purchase, install, operate, and maintain PV systems.

In short, the Solar Companies are scooping up government incentives in the forms of rebates, subsidized loans, and accelerated depreciation of PV systems. They are passing some of the savings on to you.

Now that you know the benefits, make sure you weigh the potential drawbacks of a Solar Power Purchase Agreement.

Eddie Wills started to provide Personal Finance, Benefits, and life advice for Federal Employees and Veterans. His goal is to help federal employees and veterans learn more about the benefits available to them so they have more energy for their families, jobs, and other goals they may have.

  1. I’m surprised more people don’t have PV given your electricity costs. I’ve been looking for years at doing self installed PV and find the numbers to close do to low electricity costs, are current rates are right at 7c/kwh.

    Using your numbers, I would have been tempted to purchase the system outright.
    I assumed your system cost is $16,000 – 30% fed tax credit = $11,200.00. Your year 1 savings is $868, so your ROI is 7.75%. I not aware of any comparable investment that yields 7.75% tax free. You could even borrow the money and get a few percent a year back.

    Your installed price after tax credit is $2.80 /w. My costs to self install run about $1.75 /w, my state offers an additional credit to drop it t0 $1.25 /w. But the math is difficult for me when electricity is 7 c/kwh.

    Another issue is the value of SRECs, which is very important in some markets.

    • I think homeowners are reluctant to invest the capital, and they also haven’t explored their PPA options. Maybe Eddie’s posts will fix that! This post was the most popular one of the month.

      Your math is correct, and our PV array is the highest-yielding asset in our investment portfolio.

      We’re starting to see grid penetration limits (15%) being approached in some neighborhoods. In my six-block street area alone, the grid penetration seems to be much higher with PV arrays on at least 30% of the houses.

      I’m not aware of a Solar Renewable Energy Credit program here. I could be wrong, but I’ve never heard or read of it.

    Comment? Question? What's on your mind?