Power purchase agreements: What you need to know

You've probably seen the pitch: "Go solar for $0 down!" It sounds appealing—solar panels on your roof, lower electric bills, and you don't need to come up with the $30,000 that solar costs on average upfront. That's the basic promise of a power purchase agreement (PPA).

The concept is simple: A solar company installs and owns the system on your property. You pay them for the electricity it produces, usually at a rate lower than your utility charges. No ownership, no maintenance, immediate savings. It's solar access without the solar investment.

But like any financing decision, PPAs come with pros and cons that you should consider. We'll break down how PPAs actually work to help you determine if they make sense for you.

Financing a solar panel system with a PPA is a third-party ownership arrangement where someone else owns the system on your property. A solar company or PPA provider covers all the costs associated with purchasing and installing solar equipment on your roof. Although the solar panel system is on your property, it's owned by them, which means they're responsible for any necessary maintenance.

The solar panels generate electricity, powering your home and allowing you to save on your monthly utility bills. In exchange, you pay the system owner—typically the PPA provider or solar company—a set rate for each kilowatt-hour (kWh) the solar panel system generates. The rate is typically lower than what your utility company charges for the electricity you'd otherwise use from the grid, which is how you save money.

Unlike solar leases, which have a fixed monthly price, PPA charges vary from month to month since your bill is based on the solar panel system's production. Because solar panels typically produce more electricity during the summer than during the winter, most people experience higher PPA payments during the summer months—but they also save more on electric bills.

One of the most important things to understand about PPAs is how solar incentives factor into the equation. Unlike when you own your system, you can't directly claim most tax credits or rebates with a standard PPA—but that doesn't mean those incentives disappear.

Standard PPAs

With a standard PPA, the solar company that owns your system claims any available incentives. While the federal solar tax credit expires for purchased systems installed after December 31, 2025, third-party owned systems like PPAs and leases continue to qualify for it if they begin construction before July 2026 or are placed in service before 2028.

A reputable PPA provider should factor the value of the federal tax credit into your pricing, resulting in a lower per-kilowatt-hour rate than they'd charge without those incentives. However, you have no direct control over how much of that benefit gets passed through to you. When evaluating PPA offers, it's worth asking explicitly how the federal tax credit affects your rate and whether the provider can show you pricing with and without that incentive factored in.

Most state and local incentives—including state tax credits, performance-based incentives, and solar renewable energy certificates (SRECs)—also go to the system owner under a PPA if they're available to non-residential owners. Like the federal credit, these may be reflected in your rates, but there's no guarantee of how much value gets passed to you.

Pre-paid PPAs: A path to ownership

Some homeowners choose pre-paid PPAs, where you pay the full cost of electricity upfront rather than monthly. This works differently than standard PPAs in an important way: While you're still technically purchasing power through an agreement, the upfront payment structure can eventually lead to system ownership after a set period—often around six years.

The advantage here relates to tax credits. Because the solar company initially owns the system under a PPA structure, it claims the federal tax credit and passes some of those savings back to you through a lower upfront price. After the agreed-upon period, ownership transfers to you. This approach works well for homeowners who have cash available, want to benefit from the federal tax credit, and care about system ownership. However, you'll want to carefully review the contract terms around the ownership transfer timeline and any conditions attached to it.

With pre-paid PPAs, any state incentives available to non-residential owners go to the company during the initial ownership period and should be factored into your upfront price. Once ownership transfers to you, you may be eligible for certain ongoing incentives if they're still available in your area.

As with all financing solutions, going solar with a PPA has both advantages and disadvantages. Understanding these trade-offs is essential to making the right choice for your situation.

Advantages of PPAs

Disadvantages of PPAs

PPAs make sense for many homeowners, particularly in the current market. With third-party owned systems still qualifying for the federal tax credit, PPAs offer a straightforward path to solar savings without navigating complex tax situations or tying up significant capital.

If you want immediate savings, prefer someone else to handle system maintenance, or need to keep your cash available for other priorities, a PPA can be an excellent choice. You'll start saving on your electric bill right away (typically 10-20%), and those savings continue for the 20+ year term of your agreement. The trade-off is that total lifetime savings will be lower than ownership—owned systems typically generate $37,000 to $148,000 over 25 years, while PPAs deliver a smaller but still meaningful reduction in energy costs.

The decision comes down to your priorities. Both ownership and PPAs lead to lower energy costs and reduced carbon footprint—they just get there differently. Consider what matters most in your situation: simplicity and liquidity, or maximum savings over time.

Solar's biggest advantage isn't the technology—it's the certainty. When you generate your own electricity, you're no longer guessing what your power will cost in five, 10, or 20 years. You've locked it in.

PPAs offer a path to solar that requires nothing upfront and little ongoing thought. Ownership offers a path to substantially greater financial returns. Neither is universally right nor wrong. But understanding the difference means you'll make the choice that's right for you, not just the one that was easiest to say yes to.