The Core Distinction Between a PPA and a Lease
Both power purchase agreements and solar leases allow a commercial facility owner to install solar without purchasing the system outright. The fundamental difference is in what you are paying for. Under a PPA, you purchase the electricity the system produces at a negotiated per-kilowatt-hour rate. Under a lease, you pay a fixed monthly amount to use the equipment regardless of how much electricity it generates. That distinction matters because it changes how production variability — a cloudy month, a soiling issue, an equipment outage — affects your costs and savings.
Who Owns the System and Who Gets the Tax Benefits
In both structures, the solar company retains ownership of the system. That means the system owner — not the property owner — claims the federal Investment Tax Credit and the depreciation benefits. The solar company typically prices the PPA rate or lease payment to reflect those benefits. Property owners evaluating third-party ownership structures should understand that they are effectively buying down the cost of those tax benefits through a long-term payment commitment rather than accessing them directly.
For taxable commercial entities with sufficient tax appetite — businesses or property owners who can use the ITC directly — a cash purchase or a bank loan that preserves ownership and the associated tax benefits often produces a better long-term financial outcome than a PPA or lease. The right answer depends on the specifics of the business's tax position, which is worth discussing with a tax advisor before committing to a structure.
Term Length and Property Transfer
PPAs and leases typically run 20 to 25 years. That term needs to be considered alongside how long you expect to own or operate the facility. If you sell the property before the term ends, the agreement typically transfers to the buyer or requires a buyout. Either outcome can complicate a transaction. Buyers and their lenders have varying levels of comfort with inherited solar agreements, and this has become a meaningful due diligence item in commercial real estate transactions in California.
Questions to Work Through Before Choosing
- Do you have federal tax liability that makes the ITC directly valuable to you?
- What is your expected ownership horizon for this facility?
- Can you access commercial financing for an outright purchase at terms that make the owned-system economics more attractive?
- How does the proposed PPA escalator rate compare to your expectation for utility rate changes over the contract term?
OM Energy works with commercial clients across all financing structures — purchase, loan, PPA, and lease — and can model the long-term financial difference for your specific situation before you commit to a path.
