PPA vs outright purchase vs lease: the full comparison

There are three ways to put solar on a commercial roof. Almost every conversation we have with a finance director starts by conflating them.

You can buy the system outright, lease the equipment, or sign a power purchase agreement (PPA). Under a PPA, you simply buy the electricity the system produces, rather than owning it.

Each option moves capital, tax relief, risk and balance-sheet exposure to a different place. The right answer depends on your cost of capital and your appetite for owning plant. Increasingly, it also depends on what your auditor will let you keep off the balance sheet.

Below is the comparison we’d actually put in front of a board, not the simplified version most sales material uses.

The three routes at a glance

	Outright purchase	Equipment lease	Power Purchase Agreement (PPA)
Upfront capital	Full cost, paid or loan-funded	Little to none	None
Who owns the system	You	Usually the lessor	The developer/funder
Capital allowances	Yes — AIA, then special rate FYA	Usually the lessor’s, not yours	None — no asset to claim on
O&M responsibility	Yours	Negotiated, often yours	Developer’s, for the contract term
Typical term	N/A — you own it	5–10 years, asset-dependent	10–25 years
Electricity price	Free once paid off, minus O&M	Free once paid off, minus rentals	Fixed or index-linked rate per kWh, usually below grid
Balance-sheet impact	Fixed asset + any loan liability	Right-of-use asset + liability (most leases, from 2026)	Depends on contract terms — see below

Outright purchase: full ownership, full tax relief, full risk

Buying the system outright gives you every pound of the return. But you only get that return in full if you can also use the tax relief.

Solar panels are “special rate” expenditure under HMRC’s capital allowances rules (Capital Allowances Manual CA22335). They are not main-rate plant and machinery, and haven’t been since 2012. That single classification point rules out the 100% “Full Expensing” first-year allowance. It also rules out the 2026 Budget’s new 40% first-year allowance and the 18%-to-14% main-pool writing-down allowance cut, because both reliefs apply only to main-rate assets.

What solar actually gets is the Annual Investment Allowance. This gives 100% relief on qualifying spend, up to a £1 million annual cap. That cap is shared across all your qualifying capital expenditure for the year.

On anything above that cap, you get a 50% special rate first-year allowance. You then write down the remaining balance at 6% a year in the special rate pool.

For most single-site commercial systems (see our cost-by-system-size guide), the whole spend sits comfortably inside the AIA cap. That’s only true, though, if the allowance hasn’t already been used elsewhere in the same accounting year. We model that interaction rather than assume it, as part of our ROI and energy modelling.

Ownership also means you carry every risk that comes with the asset. That includes inverter replacement, panel degradation, roof penetrations, insurance, and whatever the maintenance contract doesn’t cover. On the balance sheet, it’s the simplest of the three routes. It shows up as a fixed asset, depreciated over its useful life, plus any loan liability if you didn’t pay cash.

Equipment lease: low capital, but check who actually gets the tax relief

A lease looks like a halfway house: you get the system without the upfront capital. But the tax position is the detail most guides skip. Under general capital allowances rules, it’s normally the lessor, not you, who owns the asset and claims the allowances. That’s because entitlement follows ownership.

There’s an exception: the “long funding lease.” When a lease meets HMRC’s long-funding-lease tests, entitlement to claim capital allowances can shift to the lessee instead. But the lessee must elect into that treatment on their tax return. If they do, HMRC restricts the deduction they can claim for the lease rentals to compensate (HMRC Business Leasing Manual, BLM42010).

In practice, don’t assume a solar lease hands you any capital allowance at all. Check which side of that line your specific contract falls on first.

From 2026, leases also look different on the balance sheet. Under the FRC’s Periodic Review 2024 changes to FRS 102, the old operating-lease-vs-finance-lease split largely disappears. This applies to accounting periods starting on or after 1 January 2026.

Almost all leases now go on the balance sheet as a right-of-use asset and a matching lease liability. Only short-term leases (12 months or less) and low-value-asset leases stay exempt. A UK GAAP reporter could once keep an equipment lease off the balance sheet as an “operating lease.” Generally, they can no longer do that.

PPA: zero capital, but read the contract before you assume it’s off balance sheet

Under a PPA, a developer installs, owns and maintains the system on your roof or land. They sell you the electricity it generates, usually below your current grid tariff, for a fixed term. UK commercial solar PPAs typically run 10 to 25 years (Solar Energy UK — Power Purchase Agreements). The price is either a flat rate for the term or index-linked, using RPI/CPI or a fixed annual escalator.

The developer carries all the operations-and-maintenance risk for the contract’s life. You claim no capital allowances, because you own no asset. The trade-off for zero capital outlay and transferred technical risk is that all the tax relief sits with the developer. It’s priced into their tariff rather than handed to you directly.

The balance-sheet question is the one that catches boards out. A PPA structured as a genuine service contract stays off the balance sheet. Here, you’re simply buying kilowatt-hours, with no right to direct how the developer uses a specific, identified asset. The per-kWh cost runs through the P&L as an operating expense.

But both IFRS 16 and, from 2026, FRS 102 test the substance of the arrangement, not its label. If the contract effectively gives you the right to control the use of an identified system, the arrangement counts differently.

For example, you might have exclusive rights to all the output of a specific array, with no real substitution right for the developer. In that case, the arrangement counts as an embedded lease. It then lands back on the balance sheet as a right-of-use asset and liability anyway. Get a second opinion on that distinction before signing — not after your auditor raises it.

A decision framework, not a rule of thumb

The right route depends on how these five questions come out for your organisation. It’s not simply about which option is cheapest per kWh in isolation:

• Do you have unused Annual Investment Allowance this year? If yes, outright purchase captures tax relief a PPA simply can’t offer you.
• What’s your cost of capital versus the PPA’s implied discount rate? A PPA is, in effect, a loan at whatever rate its tariff embeds. That rate is sometimes cheaper than your overdraft, sometimes not.
• How sensitive are your banking covenants to new balance-sheet liabilities? Post-2026, a lease or an embedded-lease PPA both add a new balance-sheet liability. That liability wasn’t always there before.
• Do you want to own maintenance risk for 20+ years, or transfer it? Price a PPA’s fixed-term O&M cover against your own maintenance budget — don’t assume it’s free.
• What happens at the end of the term? Ownership never ends. A lease or PPA needs an explicit end-of-term clause — buy-out, removal, or contract renewal. Review that clause before signature, not at year 24.

None of these has a universally right answer. A well-capitalised business with unused AIA headroom usually does better buying outright. A business that wants zero capital exposure and no O&M risk often prefers a PPA, even at a lower lifetime return.

We model all three routes against your actual tax position, cost of capital and balance-sheet appetite. We also review the heads of terms or contract before you commit, through our PPA and financing advice service. The best structure is the one that fits your business, not simply the first one pitched to you.