Most business owners evaluating a Power Purchase Agreement compare it on one number: the per-kilowatt-hour rate versus what they’re currently paying the utility. That comparison is real, but it’s evaluating a 15-to-25-year financial commitment using only its first-year sticker price, closer to judging a mortgage by the first month’s payment than by the actual terms of the loan.
What’s Actually Happening in a PPA
In a PPA, a third-party developer or financier, not your business, owns the solar equipment on your property. That entity finances, installs, and owns the system for the life of the agreement, and your business, as the “offtaker,” agrees to purchase the electricity it generates at a pre-set rate for the term of the contract, typically 15 to 25 years.
Because the provider owns the system, the provider (not your business) claims the federal Investment Tax Credit under Section 48E and any applicable depreciation. That’s the central structural fact that makes a PPA fundamentally different from ownership: you’re buying electricity at a set rate, not buying equipment and its associated tax benefits.
When a PPA Makes Sense vs. When Ownership Does
Neither structure is universally better. The right one depends on your business’s specific financial position, not a general rule.
A PPA tends to fit when your business doesn’t have the capital available to purchase a system outright, when your tax liability isn’t large enough to make full use of the 30% credit and depreciation on your own, or when predictable energy costs without any capital exposure or maintenance responsibility matter more than maximizing long-term savings.
Ownership tends to fit when your business has access to capital or financing, has enough tax liability to actually use the credit and depreciation, and plans to hold the property for the long run. Payback periods on owned commercial systems commonly land in the 5-to-9-year range, after which the system produces power at close to zero marginal cost. A hybrid path exists too: PACE financing lets a business own the system and claim the tax benefits while spreading the capital cost over time through a property assessment rather than a traditional loan.
We’ve broken down the cost side of ownership, including the current tax-credit timeline, in a separate post on commercial solar cost, which is worth reading alongside this one if you’re weighing both paths.
Four Questions to Ask Before Signing
These apply to any PPA proposal, regardless of which company is offering it:
- What’s the rate, and does it escalate? Many PPAs include an annual escalator, commonly in the 1 to 2% range. Calculate the effective rate over the full contract term and compare it to a realistic utility rate projection, not just the year-one number.
- Who actually owns the system, and what’s their track record? The system owner is your financial counterparty for up to 25 years. Ask about their business history and what happens to your contract if they’re acquired or go out of business.
- What happens if you sell the property? Confirm in writing whether the PPA is assumable by a buyer, and what it costs if it isn’t.
- What are the performance guarantees, and are they enforceable? If the system underperforms its projected output, the remedy should be specific and in the contract, not a verbal assurance.
How This Applies Across Industries
PPAs tend to show up most often with capital-constrained or margin-sensitive operators: grocery and cold storage operations watching every point of margin, golf courses and houses of worship without large capital reserves, and multifamily properties funding new EV infrastructure requirements alongside solar. The underlying structure described above is the same regardless of industry; what changes is which side of the “when a PPA makes sense” list a given business typically falls on.
A PPA is a legitimate financial tool for the right business. The value of understanding the mechanics above is that you can evaluate a proposal on its actual terms (rate, escalation, counterparty, exit provisions) instead of just the opening rate comparison.
Received a PPA proposal and want a second set of eyes on it? Talk to Pacific Solar about whether a PPA or ownership makes more sense for your specific business.
Frequently Asked Questions
What happens to my contract if the PPA provider goes out of business?
This should be addressed explicitly in the contract. Ask specifically what happens in an acquisition or bankruptcy scenario before signing, since PPA agreements are generally assignable assets that can transfer to a company you didn’t choose.
Can I buy out a PPA early?
Many PPAs include a buyout option at a pre-agreed price or fair market value, but terms vary significantly by provider. Confirm this specifically rather than assuming it’s standard.
Does the rate ever go down instead of up?
Rarely. Most PPAs include a flat rate or an annual escalator; a rate that decreases over time is uncommon and worth scrutinizing if offered.