Residential Leases and PPAs; Questions for Homeowners to Ask If Considering a Solar Lease or a Solar Power Purchase Agreement
RIO VISTA, Calif.–(BUSINESS WIRE)–In 2008 new financing options for homeowners wanting solar systems were introduced in California. These options were designed to overcome the biggest obstacle to potential solar users: the first cost to acquire the system. For typical residential solar installations the cost is around $40,000 but after tax credits and state rebates it is usually around $25,000 in out-of-pocket expenses. Most homeowners pay cash or finance the purchase.
For homeowners who are considering one of the new leasing or power purchase methods, there are important considerations because these homeowners will not own the system. The system will be owned by the leasing company or the power purchase company.
How does a lease or power purchase agreement work?
A lease allows a customer to make a monthly payment over a fixed term, like 5, 10, or 15 years. At the end of the term the homeowner will have the option of paying for the remaining value of the system or having it removed. Interest is charged on the balance of the value of the solar system for the duration of the lease.
A power purchase agreement is a long term contract to buy electricity produced by the solar system. The term of the contract is typically 15 to 20 years. The site owner does not own the solar system during the term of the contract. At the end of the contract the homeowner will have the option to purchase the system for the remaining value of the system or having it removed. Some of these contracts also allow a customer to purchase the system before the end of the term of the contract. The cost of the electricity from the solar system will escalate over the term of the contract and the escalation rate will be specified in the contract. The escalation rate may or may not be at the same rate that the local utility will charge over the same period. The homeowner will still be a customer of the local utility and purchase electricity from the utility when the solar system does not produce electricity (such as overnight or on a cloudy day).
In both a lease or power purchase agreement, the company receives both the tax credit and any state rebates.
Do state or federal regulations govern these leases or power purchase agreements?
Not at this time. These financing options are a new development in the retail solar market. Power purchase agreements have been used successfully for transactions between wholesale power generators and utilities. They have also been used successfully in large commercial solar installations since 2006. The terms and conditions of the commercial power purchase agreements are negotiable and most commercial projects are reviewed by the customer’s attorney(s) and accountant(s).
Legislation recently sent to the Governor’s signature (AB 2863, 2008) will establish disclosure requirements for residential leases and power purchase agreements. If the bill is signed into law, it will require:
1. A good faith estimate of the kilowatt-hours to be delivered by the solar energy system.
2. A plain language explanation of the terms under which the pricing will be calculated over the life of the contract and a good faith estimate of the price per kilowatt-hour.
3. A plain language explanation of operation and maintenance responsibilities of the contract parties.
4. A plain language explanation of the contract provisions regulating the disposition or transfer of the contract in the event of a transfer of ownership of the residence, as well as the costs or potential costs associated with the disposition or transfer of the contract.
5. A plain language explanation of the disposition of the solar energy system at the end of the term of the contract.
AB 2863 will also require that the leasing or power purchase company:
- Record a notice on the title of the property. If the contract is terminated or sold, they must file a new notice.
- Must provide a copy of the contract to a prospective buyer of the home if the homeowner is selling their home.
Questions to ask if a homeowner is considering a solar lease or solar power purchase agreement
Since homeowners do not usually have an attorney and accountant to review the agreements, the following questions are good questions to ask if they are considering a lease or power purchase agreement to have a solar system installed on a home. Getting these questions answered in writing will help the homeowner in the event that a dispute develops later about the terms of the arrangement.
1. Who is the installation company? (Not all financing companies have a contractors’ license so they will contract with an installation company to perform the construction work.)
2. Does the contractor have a license to install solar?
3. Does the contractor have workers’ compensation insurance?
4. Is the contractor reputable and have a good track record for installations?
5. Can the contractor file a mechanics lien against the house?
6. Is there a separate contract for the installation of the system?
7. What is the assumed inflation (sometimes called escalation) rate for the solar electricity payments? (If the solar electricity payments escalate faster than the utility electric rates can the homeowner end up paying more for electricity over the life of the contract because they bought a solar system?
8. Does the contract obligate the homeowner to buy the system at the end of the contract? How much will the homeowner be expected to pay at the end of the contract? (Some contracts will state that the homeowner must pay the fair market value for the system. What is the value of the system after 10 years? 15 years? What is the actual cash price at the end of the term (not adjusted down for value of money)?
9. What happens if a homeowner refinances the house? Are there any clauses or language in the agreement restricting this? Are there any documents that the bank or appraiser will need?
10. Who is insuring the system in the event of damage (due to accidental damage to the home or vandalism, for example)? Does the homeowner have to pay for any or all damages? What should the homeowner report to their insurance company? Assuming the company insures the system; will the homeowner receive a certificate of insurance naming the homeowner on the company’s insurance policy?
11. Who is responsible for the warranty of the system? Is the warranty to the homeowner from the installer or is the warranty from the installer to the leasing or PPA company? Who does the homeowner file a claim against if there’s a problem, like a roof leak? Has the company had any claims? How have they been handled?
Terms of the Contract
12. Are there any costs to buy out the lease or PPA early in the first 5 years? If the homeowner buys out the lease or PPA in the first 5 years will they have to also pay the company for the loss of the tax credits and depreciation?
13. What is the implicit interest rate that the homeowner is paying in the lease/PPA?
14. What happens if the homeowner needs a new roof and the system needs to be moved? Who will cover the module warranties if the modules are moved? (Many module manufacturers void the warranty if the modules are moved).
15. Whose responsibility is it to restore the roof and replace shingles or tiles if the homeowner decides to have the system removed at the end of the term?
Sale of Home during term of Contract
16. What happens if the homeowner sells their home?
17. Can the contract be sold or assigned to someone else if the house is sold? What is the qualification process/what are the requirements for a new party assuming the lease/PPA?
18. What if someone who wants to buy the house but doesn’t qualify to assume the lease/PPA?
19. What if someone who wants to buy the house but doesn’t want the solar system?
20. Does the company provide production guarantees? How is that tracked and does that affect the monthly payments that the homeowner makes (i.e., will the monthly payment be adjusted if the system underperforms?
21. Is the homeowner responsible for any of the maintenance or monitoring?
22. Assuming the homeowner monitors the system, if there are production issues what is the company’s response time?
Fiscal condition of the Financing Company
23. Is the company financially sound?
24. Can the company sell the contract to a new entity? Will the homeowner be notified?
25. What happens if the leasing company or PPA company goes out of business?
26. Could the system be repossessed or removed if the PPA/leasing company gets into financial trouble?
27. Does the company maintain a reserve account for repairs? How much is set aside for repairs and are the funds kept in an escrow account?