How a Community Solar Site Lease Works, and How it Differs from a Power Purchase Agreement
Part 2 of a 3-article series outlining the various ways of financially structuring a commercial solar purchase. Please reference the previous article explaining how Power Purchase Agreements Work.
A Community Solar Site Lease is a distinct financial structure compared with a Power Purchase Agreement (PPA). While both enable businesses to benefit from solar energy without bearing the upfront costs of installation, and both involve third-party or developer ownership; they differ in their structure, energy consumption requirements, and the way value is distributed.
With a Community Solar Site Lease, the site owner leases rooftop or land space to a solar developer or third-party investor, who is responsible for designing, installing, owning, operating and maintaining the solar system. Unlike a PPA, where the business consumes the electricity generated on-site, a community solar system directs the generated electricity to local subscribers within the community. The site owner receives value primarily through lease payments, which provide a consistent revenue stream, and, in some cases, an upfront infrastructure improvement such as a roof restoration or an electric upgrade.
In contrast, a Power Purchase Agreement connects the solar system directly to the business’s operations, requiring a requisite level of on-site electricity consumption. The business purchases electricity generated by the system at a discounted rate compared to traditional utility prices. Over time, this results in substantial energy cost savings for the business. However, to justify the system’s size, the facility must have sufficient energy demand.
The financial metrics of each structure also reveal their differences. In a Community Solar Site Lease, the value is distributed through a combination of upfront infrastructure improvements and annual lease payments over the contract term, typically 20 to 30 years. The lease terms may include fixed or escalating payments, while the electricity generated is sold to community subscribers at discounted rates determined by the local market. At the end of the term, the site owner may purchase the system at fair market value, extend the lease, or request decommissioning at no cost.
In a Power Purchase Agreement, the value is instead distributed primarily through discounted electricity rates. The business benefits from immediate energy savings, with long-term discounts typically increasing over the life of the agreement.
One notable advantage of a Community Solar Site Lease is that it does not require significant on-site energy consumption, making it ideal for facilities with large rooftops or open land but limited energy demand, such as warehouses or distribution centers. A PPA’s viability, by contrast, is dependent on the energy needs of the facility, which limits its application to sites with high and consistent electricity usage. (Note that in some states such as Pennsylvania and Connecticut, a “Feed-in-Tariff” style program exists which offers something of a blend of these two structures, allowing a system to feed both the on-site energy user, as well as the greater energy grid.)
Businesses have a surprising set of options to reduce their cost of power while contributing to renewable energy adoption, all without the need for upfront capital or operational involvement. Choosing the best
