If you’ve looked into solar for your facility, you’ve probably heard the pitch: “No money down. Lower your power bill from day one.” That’s usually a solar power purchase agreement (PPA). For some businesses a PPA is a smart fit. For others it quietly leaves tens or hundreds of thousands of dollars on the table.
This guide explains how a commercial solar PPA works, what to look for in the contract, and how it compares to owning your system, so you can decide with clear eyes.
What is a solar PPA?
In a solar PPA, a third-party developer designs, installs, owns, and maintains a solar system on your roof, carport, or land. You don’t buy the system. Instead, you agree to buy the electricity it produces, at a set price per kilowatt-hour (kWh), for a fixed term, usually 15 to 25 years.
That price is typically set below what your utility charges. It also usually includes a built-in annual increase (an escalator), commonly 1% to 3% per year.
The basic flow
- The developer finances and builds the system at no upfront cost to you.
- The system produces power, and you use it on-site.
- You pay the developer a per-kWh rate for the solar energy, and the utility for whatever you still draw from the grid.
- At the end of the term you can usually renew, buy the system at fair market value, or have it removed.
Why businesses choose PPAs
- Little or no upfront capital. Cash stays available for equipment, hiring, or inventory.
- Predictable pricing. A fixed (or fixed-escalator) rate shields part of your energy spend from utility rate hikes.
- Performance risk sits with the owner. If the system underproduces, the developer feels it, not you.
- Maintenance is handled. Monitoring, repairs, and inverter replacements are the owner’s job.
- Possible off-balance-sheet treatment. Depending on accounting standards and how the contract is structured, a PPA may not appear as debt. Ask your CPA, because rules around leases have tightened.
The trade-offs most sales pitches skip
1. The developer keeps the big financial benefits
When you own a system, you capture the federal tax credit, depreciation benefits (100% bonus depreciation was made permanent in 2025, though how it applies to a given project is a question for your CPA), and any grant dollars that are available. In a PPA, the developer captures those and prices them into the deal. You receive a slice of the value in the form of a discounted rate. Ownership typically captures far more of it.
2. Long contracts and escalators
A 20-year agreement with a 2.5% escalator may start out cheaper than the utility and look worse later if utility rates rise slower than expected. Model the full 20+ year cost, not the year-one savings.
3. Lower lifetime savings
Quality commercial panels are built to last 30 to 40+ years. In a PPA you pay for the power for roughly half that life. After you own a system, the electricity is effectively free apart from light maintenance (typically well under 1% of system cost per year).
4. Roof and property complications
A system owned by someone else touches your property. Expect a lease or easement, a lender or landlord consent, and clauses about roof repairs, replacement, and sale of the building. Poor wording here can delay or complicate a refinance or sale.
5. The federal tax credit is on a clock, and a PPA developer is on the same clock
The 2025 federal budget law (the One Big Beautiful Bill Act) ends the commercial solar investment tax credit (Section 48E) for systems that are placed in service after December 31, 2027, unless construction began by July 4, 2026. That start date has now passed. In practice:
- If a project did not begin construction by July 4, 2026, it generally needs to be placed in service by December 31, 2027 to claim the credit. For a project that hasn’t started, that is a firm and fast-approaching deadline.
- If construction began on time (through the physical-work test or the 5% cost test), the project can get extra time to finish under the “continuity” rules. Documentation matters.
- The rules on what counts as “beginning construction” have been in flux. Treasury’s August 2025 guidance (Notice 2025-42) eliminated the 5% safe harbor for solar systems above 1.5 MW. In June 2026, a federal court vacated that notice, which restores the 5% safe harbor, at least for now. Further IRS guidance or an appeal could change that again, so don’t build a project plan on it without tax counsel.
- Foreign-sourcing (FEOC) restrictions now apply to projects that begin construction after December 31, 2025. Equipment sourcing must meet “material assistance” limits, and developers must certify compliance.
A PPA provider claims the credit, so the credit’s value is baked into its price. If the developer can’t meet the deadlines, expect rates to rise or the offer to go away. Whoever owns the system, the practical message is the same: timeline now drives the economics. Read our guide to safe harbor for commercial solar tax credits and confirm your situation with a tax advisor.
PPA vs. leasing vs. owning
| PPA | Equipment lease | Own (cash or loan) | |
|---|---|---|---|
| Upfront cost | Typically $0 | Low or $0 | Cash, or $0 with financing |
| Who owns the system | Developer | Lessor | You |
| You pay | Per kWh produced | Fixed monthly payment | Loan payment (if financed) |
| Tax credit and depreciation (if the project qualifies) | Developer | Usually lessor | You |
| Grants (when available) | Usually not available | Varies | You |
| Maintenance | Developer | Often you | You (or a service plan) |
| Typical lifetime savings | Lowest | Middle | Highest |
The right answer depends on your tax appetite, balance sheet, and timeline. Many businesses assume they can’t afford ownership. In practice, financing can make owned solar cash-flow positive from year one, with no money down, and you keep the incentives. That’s why PPAs should be compared to financed ownership, not just to a cash purchase. One option many Midwest businesses overlook is C-PACE financing.
Is a PPA legal in my state?
Third-party ownership rules vary, and this is where local knowledge matters.
- Illinois and Ohio: Third-party solar financing structures such as PPAs are generally permitted, though specific programs, utility rules, and interconnection requirements apply.
- Michigan: The picture is murkier. Michigan caps competition in retail electricity sales (about 10% of a utility’s load is open to licensed “alternative electric suppliers”), and it is not settled that a third party can sell you on-site solar power under a PPA without running into those rules. The structure of the deal, and who is selling the power, matters. Because of this uncertainty, many Michigan businesses use ownership, loans, or leases instead. If a Michigan PPA is offered to you, ask the provider to explain, in writing, how it complies with state law, and consider having your own energy attorney review it.
Laws and utility tariffs change, so confirm current rules for your specific utility and project before signing anything.
Who is a PPA a good fit for?
A PPA can make sense if:
- You are a tax-exempt organization (nonprofit, some municipal or institutional users) that can’t use the federal tax credit directly. Some direct-pay options exist for tax-exempt entities, so compare them.
- You have no tax liability and no appetite for debt or capital spending.
- You want zero operational involvement and accept lower savings in exchange.
- Your project is in a state where PPAs are clearly permitted and the developer’s rate is meaningfully below your utility rate.
Ownership usually wins if:
- You pay federal taxes and can use the credit and depreciation.
- Your facility is 15,000+ sq ft or has high daytime electricity use (manufacturing, cold storage, food processing, warehousing).
- You plan to stay in the building 5+ years. Commercial solar payback commonly lands in the 4 to 6 year range with the federal tax credit. (USDA REAP grants, which once shortened payback dramatically, are currently paused and being restructured, so don’t count on them in your plan without checking their current status.)
Questions to ask before you sign any PPA
- What is the year-one rate, the escalator, and the total cost over the full term?
- What happens if I sell or refinance the property?
- Who pays for roof repairs or replacement that require removing panels?
- What are the production guarantees, and what are the remedies if they’re missed?
- What is the buyout price, and how is “fair market value” determined?
- What happens to tax credits or incentives if the developer’s assumptions change? Is the rate locked?
- Who handles interconnection and utility paperwork, and who is on the hook for delays?
The bottom line
A PPA is a financing tool, not a discount program. It removes the upfront cost, but it also hands the biggest financial benefits of solar to someone else. Before you choose one, get a side-by-side comparison of PPA vs. financed ownership vs. cash purchase using your actual utility bills.
At SunMatic Solar®, we’re commercial and industrial solar specialists serving Michigan, Ohio, and Illinois. We’ll model each option for your facility, including incentives, grants, and the tax picture, so you see the true 25-year numbers before you commit.
Claim your free estimate or call (231) 683-2111 to see how the options compare for your building.
Frequently asked questions
What does PPA stand for in solar?
Power purchase agreement. A contract where you buy the electricity a third-party-owned solar system produces, rather than buying the system.
Do I own the solar panels in a PPA?
No. The developer owns the system during the term. You may have the option to buy it at the end.
Is a PPA cheaper than buying solar?
Cheaper upfront, yes ($0 down). Over the system’s lifetime, owning is usually cheaper because you keep the tax credit, depreciation, and all the energy after payback.
How long is a typical commercial PPA?
Usually 15 to 25 years.
Can a PPA be combined with other incentives?
The developer typically claims the tax benefits. Grants generally require the applicant to own the system, so they usually apply to owned systems only. USDA REAP grants are currently paused and being rewritten, so check their status.
Is there a deadline for the federal solar tax credit?
Yes. Commercial solar must generally be placed in service by December 31, 2027, unless construction began by July 4, 2026. This applies to owners and PPA developers alike.
What happens to a PPA if I sell my building?
The agreement is typically transferred to the buyer, or you pay a buyout. This is a key contract term to negotiate.
Last updated: October 2026. This article is general information, not tax, legal, or accounting advice. Incentive rules and state regulations change; consult your tax and legal advisors.