With no upfront costs, solar leases are an attractive option to industrial and commercial property owners. Solar leases, also known as Power Purchase Agreements (PPAs), allow a business to make use of the benefits of solar power (such as reduced electricity costs, lower carbon emissions and fixed tariff increases below Eskom average increases) without a large capital outlay.
How does a solar lease or PPA work?
Solar leases work differently to purchasing a solar system outright. A solar lease will still involve a bespoke solar system being installed, but instead of this belonging to a the property owner, the owner will “rent” the system through buying electricity from the system at a fixed tariff, for a number of years. This means that the financier will own the system and charge the building owner only for the energy that is generated from the system until the lease term is over. After the end of the PPA or solar lease agreement, ownership of the system will typically transfer to the property owner.
Usually, the solar lease or PPA tariff has a fixed rental escalation, which means that the property owner is shielded from the variability of Eskom tariff increases and allows owners to accurately predict and budget for energy costs into the future. The tariff also covers all annual operating expenditure including operations and maintenance, management of the asset and insurance.
How long is a PPA or solar lease agreement?
No two building owners are the same and each agreement needs to be entered into with the client’s specific circumstances in mind. As a general rule of thumb, the longer the lease agreement term, the cheaper the initial tariff will be. In our experience, there are generally two broad types of lease terms that suit property owners – those with a longer view, and those with a shorter view.
- Longer term, more immediate savings
Some property owners do not want the risk of abrupt tariff increases and would like to experience the benefits of a solar system immediately, without upfront costs. Generally, these clients are happy to sign a 20 year PPA or solar lease agreement, to ensure a lower tariff upfront and to enjoy the benefits of solar power immediately. And even after 20 years the system will still provide energy for many years to come. For example current solar panels are guaranteed by manufacturers to perform at a minimum of 80% of their rated capacity after 25 years of operation.
- Shorter term for system ownership
Other property owners would like to own the system sooner, and as such prefer a shorter (10 – 15 year) lease term. The shorter term would result in a higher initial tariff than a 20 year lease but the system is paid off quicker resulting in more years of free energy on the back end of the lease.
What about exiting the lease?
Many property owners are cautious of signing a 20 year lease as they do not have certainty that their building will still be in their ownership after such a long period of time. As such, they should check that their agreement provides flexibility for such instances. For example, some agreements may state that after 5 years the client may elect to purchase the system outright. In the case of the client selling their premises, the agreement should contain provision to either move the system to their new premises, to buy the system, or to get the new building owner to assume the lease.
In conclusion: solar lease or PPA terms vary, depending on the type of system and client’s needs
Solar systems are a fantastic way for property owners to save money on operating costs whilst reducing their carbon emissions. Although several property owners decide to own their solar systems, many do not have the capital funds available. In these instances, a solar lease or PPA is a great way to still enjoy the savings that a solar system provides through paying a predictable, low energy tariff for several years to come.