Commercial PPA vs Direct Purchase vs Solar Lease Decision
Why this matters
A commercial property owner deciding to put PV on the roof faces three financing structures: pay cash and own the system (direct purchase), sign a Power Purchase Agreement (PPA) where a third-party owner installs and operates the system and sells the customer kWh, or lease the equipment from a third-party owner for a fixed monthly payment. The decision is driven by the owner's tax appetite, balance-sheet treatment, capital cost, and lease-vs-buy comparison of net energy cost. The solar contractor who can talk the customer through the decision wins the project; the contractor who shows up with a price-per-watt loses to the EPC-plus-finance package. This article frames the three structures.
Direct purchase (CapEx)
The owner pays the EPC contractor for the system and owns it from PTO onward. The owner claims the federal Investment Tax Credit under IRC Section 48 / 48E, takes MACRS 5-year accelerated depreciation under IRC Section 168, and books the system as a fixed asset.
Best fit: owner-occupied building, profitable C-corporation or pass-through with sufficient passive income to absorb the ITC and depreciation. The ITC requires tax appetite; an owner without taxable income loses the time-value of the credit (carry-forward exists but compresses returns).
Capital cost: cash, line of credit, or property-secured loan (PACE financing where state-enabled, conventional commercial mortgage refinance, SBA 504 in some structures).
Risk: the owner carries operating risk, warranty risk after the manufacturer warranty expires, and decommissioning liability.
Power Purchase Agreement (PPA)
A third-party PPA provider (often the EPC contractor partnered with a tax-equity investor) installs, owns, and operates the system on the customer's roof. The customer signs a long-term (typically 15 to 25 year) contract to buy the kWh the system produces at a fixed or escalating rate. The PPA provider claims the ITC and MACRS; the customer claims neither.
Best fit: non-profit, municipal, school district, or other tax-exempt customer that cannot use the ITC. Investor-owned tax-exempt structures (the PPA developer monetizes the tax benefits and passes a portion through as a lower PPA rate) only work when the host customer cannot use the credits itself.
Pricing: the PPA rate is quoted in dollars per kWh, typically with a fixed annual escalator of 1 to 3 percent. Compare the levelized cost of energy (LCOE) of the PPA against the utility's retail rate plus expected utility escalation. Compare a 25-year PPA to 25 years of utility purchases on a net-present-value basis.
Balance sheet: PPAs were historically treated as operating contracts (off-balance-sheet); ASC 842 (the current US GAAP lease standard) and IFRS 16 changed lease treatment, but a properly structured PPA that is energy-output-based and not asset-rental remains a service contract for accounting purposes. The customer's auditor signs off; the contractor should not represent the accounting treatment.
End-of-term: typical PPAs include a customer purchase option at fair market value, an extension option, and a removal-at-developer-cost option. The customer chooses at the end of the initial term.
Solar lease
A solar lease is structurally a true equipment lease: the lessor owns the system, the customer pays fixed monthly rent, the customer benefits from the energy output. The lessor claims ITC and MACRS as the asset owner.
Best fit: a customer that wants predictable monthly payments rather than variable kWh costs, and that cannot or will not use the tax credits directly. Less common in commercial than PPA because the lease accounting under ASC 842 puts the right-of-use asset and lease liability on the customer's balance sheet, defeating one of the historical appeals.
Pricing: fixed monthly payment over the lease term, with a residual purchase or extension at lease end.
Decision matrix inputs
The customer's questions to answer before selecting a structure:
- Tax appetite: profitable, marginal, or tax-exempt?
- Balance sheet posture: prefer ownership and depreciation, prefer operating-contract treatment, or neutral?
- Cost of capital: cash on hand, debt cost, weighted average cost of capital?
- Holding period: planning to hold the property 5 years, 10 years, or perpetuity? A short hold favors PPA (the buyer assumes the contract) or direct purchase (sell with the system at fair market). A lease complicates the property sale.
- Risk tolerance for operating exposure: warranty management, performance shortfall, decommissioning at end of life.
What the contractor sells
A pure EPC contractor sells the system at a price-per-watt under direct purchase. An EPC-plus-PPA contractor sells the energy at dollars-per-kWh under a long-term contract, after partnering with a tax-equity investor or a PPA platform. The PPA path is structurally more profitable for the contractor because the tax benefits are monetized at the partner's effective rate (often higher than the customer would have realized), and the EPC margin sits inside the project cost.
The IRS recharacterization risk: a transaction structured to appear as a PPA but functioning as a sale-with-financing can be re-characterized by the IRS as a sale, with the tax benefits clawed back. The structuring is the partner's responsibility, not the EPC contractor's; ensure the partner has a tax opinion letter on file before signing the customer.
References
- IRC Section 48 and Section 48E (Investment Tax Credit for energy property).
- IRC Section 168 (MACRS accelerated depreciation; 5-year recovery for solar property).
- ASC 842 Leases (FASB Accounting Standards Codification).
- US Department of Energy, Solar Energy Technologies Office, Commercial Solar Financing primers.
- IRS Revenue Procedure 2007-65 and subsequent guidance on tax-equity partnership structures.