Two ways to put solar on your roof. Buy the system, or let someone else own it and buy the electricity it produces. Both are legitimate, and the right answer depends on things that have little to do with solar.
Direct purchase. You pay the capital cost, own the asset, and consume the electricity for free thereafter, minus operating costs. You carry the performance risk and take the full benefit.
Power purchase agreement. A third party funds, installs, owns and maintains the system on your site. You buy the generated electricity at an agreed rate, typically below your grid tariff, for a term of 10-25 years. No capital outlay.
There are variants – operating leases, energy service agreements, on-bill arrangements – but the fundamental split is whether the asset sits on your balance sheet.
The mistake is comparing PPA rate against current grid tariff and stopping. That comparison always flatters the PPA, because it ignores what you gave up.
Under direct ownership, your effective cost per kWh across the asset life is roughly total lifetime cost divided by total lifetime generation. For a well-priced commercial system in a decent resource area, that typically lands well below prevailing PPA rates – frequently in the region of half.
That gap is the PPA provider's return, and it is not unreasonable: they are financing the asset, carrying performance risk, and managing it for two decades. But you should know the size of it before deciding.
Most PPAs contain an annual escalation clause, commonly 1.5-3%. Over a 20-year term, a 2.5% escalator means the final-year rate is roughly 60% above the first-year rate.
The pitch is that grid prices will rise faster, so you stay ahead. Sometimes true, sometimes not – and if grid prices fall or stay flat, a fixed escalator can leave you paying above market for the back half of the term.
Fixed-rate PPAs with no escalator exist and are worth asking for, at the cost of a higher starting rate. Which is better depends on your view of electricity prices, which is a genuine judgement rather than a calculation.
What happens at end of term. Options usually include purchase at fair market value, extension, or removal. If purchase is intended, get the valuation mechanism defined now – "fair market value to be agreed" is a future dispute.
Early termination. If you sell the building or the site closes, what does exit cost? Buyout formulas in early years can be startling. Read the schedule.
Assignment on sale. Can the PPA transfer to a new owner or tenant? A twenty-year obligation attached to a building affects its saleability, and buyers will want to see the terms.
Roof access and repair. If your roof needs work in year eight, who pays to remove and refit the array? This is frequently silent and expensive.
Minimum purchase obligations. Some PPAs require you to buy all generated output, even when your consumption falls. If your operations shrink, you may be buying power you cannot use.
Some organisations do a PPA for the first installation to prove the concept without capital exposure, then buy subsequent systems outright once the economics are demonstrated internally.
That is a reasonable way to handle organisational risk aversion, provided the first PPA does not contain terms that make the second project awkward – exclusivity clauses on the site, or rights of first refusal on additional capacity. Check for those.