At first, Solar as a Service may not seem too different from leasing a commercial photovoltaic array. In both cases, you are avoiding the upfront cost of the solar power system and are paying a periodic fee instead. However, there are differences in how you pay for solar power in each case, which affects the resulting cash flow. In general, both options offer electricity savings, but they differ in how savings are achieved.
The basic principle of a commercial solar lease is paying for the right to use a photovoltaic system owned by the provider, not very different from renting commercial property or vehicles. For comparison, Solar as a Service consists on paying for the electricity delivered by the photovoltaic system. Normally, solar as a service is based on a contract called a Power Purchase Agreement (PPA), where the client does not pay upfront for the installation an instead they agree to purchase its electricity for a predetermined period of time.
When companies deploy a commercial solar power system through a PPA or a lease, they normally do so for the same reason: to avoid the upfront payment. This frees up capital for business operations, plant expansions, equipment purchases and other similar investments. Alternatively, a company can use the capital for energy efficiency upgrades, reducing electricity expenses even more. Some promising examples are lighting retrofits and air conditioning equipment replacements.
This article will discuss the differences between solar as a service (PPA) and solar leasing, pointing out the advantages and disadvantages of each option. There is also common ground, and some recommendations apply for both cases.
The main advantage of solar as a service is paying based on the amount of kilowatt-hours delivered. If a month is sunny and the photovoltaic array is very productive, you purchase more low-cost electricity. On the other hand, if a month is cloudy and power generation is diminished, you purchase less. Of course, the negotiated PPA price is lower than the electricity tariff to offer savings – this is why solar as a service works in the first place. In a few words, a PPA guarantees savings because each kWh is sold below the local retail price.
For many commercial and industrial energy consumers, the main limitation of a solar PPA is that expenses are variable and difficult to budget accurately. Although electricity expenses are being reduced regardless of monthly variation, many managers prefer a fixed fee for the use of equipment owned by third parties – personal preferences play a role when choosing how to pay for solar power.
As previously stated, a commercial solar lease is similar to renting real estate or equipment, where you pay a fixed monthly fee regardless of how much you use the asset. In the case of solar power this offers a fixed expense that is easy to plan and budget, independent from weather conditions and the time of the year. The idea is to reduce your power bill and cover the lease payment with a portion of energy savings.
The main drawback of solar leases is getting variable savings combined with a fixed lease payment. Depending on monthly electricity generation, this can work in your favor or against you. For example, if the leased commercial solar array has exceptional performance during a given month and it produces plenty of kilowatt-hours, the lease payment will be small compared with the total savings achieved. However, the opposite can also happen: there may be a cloudy month where your savings are small but the lease payment is the same. In a very harsh winter savings may be lower than the lease payment, forcing you to cover the difference.
Regardless of whether you sign a PPA or lease the solar PV system, there are recommendations that apply for both cases.
At the end of a solar PPA or lease, you are normally given the option of buying the installation. Of course, you get it for a much lower price than a new system, since it will have accumulated many years of operation by then.
In both cases, also keep in mind that there may be government incentives for solar power. These normally go to the legal owner of the system, who is your provider in the case of a solar PPA or lease. However, discuss this aspect upfront to avoid confusion later.
Solar as a service and solar leasing give you access to a photovoltaic system without paying upfront for it, replacing the initial investment with a more manageable monthly payment. Even if the client is a large company with the capital availability to pay upfront, they may prefer these options and use that capital elsewhere.
Regardless of which option you choose, make sure you are working with qualified professionals. Make sure the contract terms are clearly discussed upfront to prevent misunderstandings down the road. As a client, you must be aware of what is included in the PPA kilowatt-hour price or the lease payment before you sign, but a reputable provider will not mislead you. Both solar leases and PPAs should be win-win agreements, where the provider assumes financing and maintenance in exchange for a portion of the energy savings.