need

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A solar power purchase agreement (PPA) is a financial arrangement in which a third-party owner installs, owns and operates a solar system on your property. Then, you buy the electricity generated by the system for a set period at a predetermined rate.

How does a solar PPA work?

When you sign up for a solar PPA, you’re typically entering into a contract for 10–25 years

. You agree to purchase the power generated by the solar system for the term of the contract, which is why it’s called a power purchase agreement.

Under a solar PPA, the solar company owns the system, so you’ll pay for the electricity even though it’s on your property.

  • Every month, the solar company will charge you a set per kilowatt-hour rate for the electricity the system produces. That rate is usually lower than what the local utility charges for electricity. 

  • Your bills will vary from month to month, depending on how much electricity the system produces.

  • You’ll probably still get an electric bill from your utility. That’s because you’ll likely need to pull power from the electric grid at night or on cloudy days, when your solar panels aren’t producing enough electricity (or any electricity). 

  • If the solar system generates more electricity than you’re using at any given time, you can sell that extra electricity back to the grid by taking advantage of net metering if your utility offers it

    .

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Solar PPA pros and cons at a glance

Solar PPA pros

Solar PPA cons

Don’t have to spend thousands to buy and install the equipment.

Can’t take the solar tax credit, because you aren’t the owner of the equipment.

Electric bill savings.

Electric bill would probably be even lower if you owned the panels.

Fixed rate for electricity helps avoid rising utility costs.

Fluctuating monthly payments.

Easy sign-up.

Could be more complicated to sell your house.

No responsibility for maintenance.

Potential service issues.

Advantages of solar PPAs

With their relative ease of signing up and more immediate savings, solar PPAs can make solar more accessible. Chance Allred, chief experience officer at Sunrun, the largest U.S. residential solar installer, says that more of the company’s customers nationwide are now choosing a PPA over paying cash or getting a loan. Here are some reasons for that trend.

  • No upfront costs. Although the cost of going solar has come down, solar is still a big investment. The average preincentives cost for a home solar system in the U.S. at the end of 2023 was $34,122, according to EnergySage, a solar and home energy product comparison marketplace. Solar PPAs can let you enjoy the benefits of solar and savings on day one without that large upfront cost.

  • Electric bill savings. The monthly PPA payment should be lower than what you’re currently paying for electricity from the grid, which can save money every month. 

  • Hedge against rising utility costs. Average U.S. residential electricity prices rose 6.2% from 2022 to 2023, according to the U.S. Energy Information Administration (EIA)

    . Compared with electricity costs from utilities, PPA rates may be more predictable and rate increases lower.

  • Easy sign-up. It may be easier to qualify for a PPA than for a solar loan. “PPA applications can often be approved and signed in a single meeting,” Emily Moder, director of new market development at EnergySage, said in an email. However, it’s important to take the time to understand the PPA terms, Moder added.

  • No maintenance. The solar PPA company will monitor and maintain your system, so you don’t have to worry about what to do if something goes wrong. “PPAs tend to be better than solar leases in this regard because the customer pays a price per kWh and thus won’t need to pay if the system isn’t working properly,” said Roger Horowitz, director of Go Solar programs at Solar United Neighbors, a national nonprofit that helps people switch to solar.

Disadvantages of solar PPAs

Despite the many advantages, PPAs do have some disadvantages.

  • You won’t receive tax incentives. The PPA company is the equipment owner and gets the federal solar tax credit and state tax incentives for installing the system. 

  • Lower bill savings. You may save less over time under a PPA than if you owned the system, because your electric bill savings will be partially offset by PPA costs. 

  • Fluctuating monthly payments. Like your electric bill, your monthly PPA payment will vary depending on how much power your panels produce. With a solar lease or a solar loan, the monthly payments typically are fixed.

  • Property issues. If you own your solar panels, they may increase your property value. A PPA doesn’t necessarily provide this advantage, and it may even make it more complicated to sell your home. “A solar lease or PPA requires that you either pay it off or that the new buyer agrees to pay the monthly payments and take over the contract. This is more difficult in terms of a home sale than a system that you own that transfers with the home,” Horowitz said.

  • Service issues. Under a PPA, you depend on the solar company to accurately monitor your system and maintain it. Issues can arise if the company goes out of business or fails to maintain your system. “Other installers will not want to work on a system that you don’t own, and having another company work on your system could result in penalties per your agreement. This means that the service you get from the PPA company is very important — if they provide good service, you have a great provider that you can count on to keep the system running. If they don’t provide good service, you may be stuck in a very difficult situation with a long-term contract,” Moder said.

6 things to look for in a solar PPA

You’ll have a solar PPA for many years, so it’s a good idea to review the contract carefully before signing. Here are some key items to look for:

  1. Solar company reputation. Research the company via the Better Business Bureau, and ask the company for names of customers you can call to discuss their experience.

  2. Escalator clauses. Many PPA contracts contain escalator clauses that increase the rate you pay for solar power by about 2%–5% per year

    . PPAs without an escalator may start at a higher rate. The rate of increase under a PPA escalator might be lower than expected utility price increases. 

  3. Payment terms. Under a PPA, you only pay for electricity the system produces. That means if the system is producing less than expected or isn’t functioning properly, you won’t pay as much to the PPA provider. But some PPA companies estimate monthly use, according to EnergySage, so ask whether your monthly charges are based on actual energy output.

  4. Contract term length. Solar PPA contracts can run for 10–25 years and may come with early termination fees. Think about your long-term plans for your home when considering the length of your PPA contract.

  5. Your responsibilities. Check your contract for other homeowner responsibilities, such as keeping your roof free from shade, Horowitz said.

  6. End-of-contract terms. Be sure you understand what happens at the end of the PPA term, what happens if your solar company goes out of business and what happens if you sell your home before the end of the PPA term.

Is a solar PPA right for you?

A solar PPA may be a good option for you if:

  • You don’t have the cash to buy solar panels.

  • You don’t qualify for a solar loan or don’t want to have loan payments. Although solar loans don’t require collateral, they often have minimum credit score requirements.

  • You don’t owe enough in federal income taxes to benefit from the federal solar tax credit.

  • You don’t expect to sell your home in the near future.

Frequently asked questions

Source: nerdwallet.com

Apache is functioning normally

You need to understand your willingness, need, and ability to take portfolio risks. It’s an idea that straddles the line between personal preference and objective truth.

Let’s break down each of the three constituents, then put it all together with an example.

Need

Your need to take risks relates to the amount of objective investment growth required to meet your financial goals.

Understanding need starts with a comprehensive financial plan showing your projected cash flow over the next 10 or 20 years. Money in, money out, and most pertinent to today’s topic, your projected portfolio withdrawals. Those future portfolio withdrawals dictate your need for risk today.

For example: I’d argue that reader Vince (the star of Winning the Game: Retiring at 57 with $4.2M) had minor needs for investment risk. His asset base is very healthy, his withdrawals are proportionally small, and therefore, little risk is needed for Vince to meet his goals.

Whereas a family underfunded for their retirement goals might have either 1) an enormous need for investment risk or 2) the need to decrease their financial goals.

Need is about how much investment growth you require.

Ability

Ability is related to need, albeit on the opposite side of the coin. An investor’s ability to take risk is based on their capacity to withstand or recover from losses (either temporary or permanent). Need is a function of required growth, ability is a function of recovery from loss.

In general, the more assets you have, the greater your capacity to recover from loss. More assets = more ability for risk. That’s why certain high-risk, concentrated, and/or illiquid assets are only appropriate for investors with “excess capital.” Those investors are the only ones with the ability to take on that risk.

But for younger or newer investors, the ability to take on risk is directly proportional to their income and savings rate. They have long timelines of dollar cost averaging ahead of them. They have decades to make up for any losses. Their ability for risk is high.

Ability is about recovering from loss, either through excess current assets or a healthy stream of future saving.

Willingness

Willingness is the only subjective measure in today’s trio. It’s purely mental. How will you react to the higher volatility that comes with high-risk investments? Are you willing to stomach losses?

Willingness is not correlated with need or ability. That fact complicates the act of giving responsible financial advice. If someone’s need suggests large returns but their willingness cannot stomach any risk, how do we square that circle?

Willingness is the “personal” side of this personal finance topic. Need and Ability are both objective. Willingness is subjective. Each of your Willingness’s will be unique and different.

Putting It All Together

How do we combine these three factors to provide actual portfolio advice?

When I give advice, I do my best to collect both objective data and subjective feelings.

The objective data helps my colleagues and me assess Need and Ability. Based on those numbers, we can provide a range of portfolio allocations that should work well for the particular investor. e.g. “from 60% to 75% stocks, plus 35% to 15% bonds, plus 0% to 10% alternatives or private investments.”

Start with facts…

This objective portfolio range can then be combined with the investor’s subjective Willingness for risk. If they’ve voiced their opinion for high-octane risk-taking, we’ll advise them toward the aggressive end of our range. The more timid investor will be advised toward the conservative end of the range. Either way, we feel comfortable that the objective numbers will work out in their favor.

…then add feelings

But what if someone pushes back further, showing a Willingness outside our prescribed asset allocation range? There are a few outcomes from here:

  1. Sometimes, we worry that a client’s hard-headedness prevents us from providing fiduciary advice. For example, one client insisted on selling to cash during the spring of 2020 (peak COVID-19 fright in the markets) and then insisted upon staying in cash. The lost all Willingness for risk. They ignored our cautions against this move. They ended up unhappy with their results, and we were unhappy they ignored us.
  2. If a client only wants to push slightly outside our recommended range, we have a transparent and reasonable conversation. For example, an aggressive investor client asked to be invested in 100% equities despite our “max risk” recommendation of 80% stocks, 10% bonds, and 10% alternatives. That’s what their Need and Ability suggested. We discussed the pros and cons of our recommendation compared to their preference. We all understood each other, and ultimately invested their money in our stock portfolio per their preferred allocation – 100% stocks. We don’t want to make perfect the enemy of good enough.
  3. If a client is more conservative than we recommend, that typically warrants a different conversation: you might not hit your stated goals on time. In that case, our recommendation is often based on their Need for long-term growth in order to fund retirement, afford the kids’ college, buy their dream lake house, etc. But if their Willingness is conservative, then their preferred portfolio likely won’t grow fast enough. Again, we hold an open and honest conversation; each conversation feels and sounds different.

The triad of Need, Ability, and Willingness isn’t perfect. But it’s a darn good start. Combining the objective and subjective reasons for risk and reward is a terrific framework for portfolio construction.

Thank you for reading! If you enjoyed this article, join 8500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week. You can read past newsletters before signing up.

-Jesse

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Source: bestinterest.blog