Decision framework

Capex vs PPA: a decision tree for commercial solar in 2026

Published 2026-03-08 · 8 minute read · By Commercial Solar Finance editorial team

Capex vs PPA is the most common commercial solar finance question. The wrong answer costs typical projects 30–50% of lifetime saving. Five variables decide it cleanly: tax position, capex availability, balance sheet preference, occupancy horizon, and electricity supply preference. We walk through the decision tree.

Capex (capital purchase) versus PPA (third-party-owned solar with electricity offtake) is the most common single question in commercial solar finance. We see it weekly. The default answer in most cases — capital purchase wins on lifetime cost — is right but doesn't mean PPA is wrong; it means PPA is right in specific circumstances and capex is right in everything else.

The five deciding variables

In practice, five variables decide the capex-vs-PPA question:

  1. Tax position — profitable trading company (FYA captureable) versus loss-making, charity, or non-trading entity.
  2. Capex availability — is the £150k–£1m+ outlay genuinely available without straining working capital or breaching covenants?
  3. Balance sheet preference — does on-balance-sheet asset addition help or hurt your strategic position (covenant ratios, gearing, asset disclosure)?
  4. Occupancy horizon — minimum 10–15 years of expected occupation for capex; PPA needs the same on the offtaker side too.
  5. Electricity supply preference — do you want full operational control of generation, or are you happy to outsource it as a service?

The decision tree

We use a five-step decision tree on every capex-vs-PPA question:

Step 1. Are you a profitable trading company (or have a trading subsidiary)? If no → PPA leads. Without FYA capture, capex economics weaken substantially. PPA tariffs are typically pre-tax, neutral to your tax position.

Step 2. Is £150k–£1m+ capex genuinely available? If no → PPA leads. If capex is available but covenant-constrained, see Step 3.

Step 3. Does balance sheet asset addition support or hurt your covenant position? If hurts → operating lease or PPA, not capex. Banks increasingly look favourably on solar assets in modern covenant frameworks, but legacy covenants written before 2022 may treat the addition restrictively.

Step 4. Is your remaining occupancy horizon 10+ years? If no → PPA leads. Capex needs typically 8–12 years to break even. Shorter horizons need PPA or pure deferral.

Step 5. Do you want operational control of generation? If yes → capex. If indifferent → both work. If you actively prefer outsourcing → PPA.

The lifetime cost difference

For projects where capex is the right answer per the decision tree, the lifetime cost difference between capex and PPA is meaningful. On a typical 250 kWp commercial system over 25 years:

  • Capital purchase 25-year cumulative net cash: £1.0m–£1.2m on profitable trading company.
  • PPA 25-year cumulative net cash: £450k–£650k.
  • Difference of £400k–£700k goes to the PPA developer as their margin/return on capital.

That gap is the cost of accessing PPA. Whether it's worth paying depends on the alternative — for capex-constrained organisations, the alternative is "no project" rather than "capex project", and the PPA captures real value that wouldn't otherwise exist.

Where the decision tree breaks down

Three situations where the decision tree gives ambiguous answers:

Hybrid blend structures. Some projects use capex on the largest single building plus PPA on smaller satellite buildings. The economics work where the largest building is the highest-self-consumption site (capex maximises value there) and the satellite buildings have unfavourable demand profiles for capex (PPA fits their lower lifetime value).

Lease tenure inversion. Some long-PPA deals (20–25 year terms) effectively bind the offtaker to the property for the full PPA term — which the offtaker may not want. Where the offtaker prefers shorter-term contractual exposure, a green-loan-funded capex (10-year term, asset stays after) provides better operational flexibility despite slightly different economics.

Public sector + tax-paying tenant. Where a public-sector landlord (council, charity) has a private-sector trading tenant on a long lease, sometimes the cleanest structure is tenant-funded capex with rent abatement at break — the tenant captures FYA while the landlord retains property control. This sits outside the standard capex-vs-PPA frame but solves the underlying structural challenge cleanly.

The decision in practice

Of the commercial solar projects we model in 2026, roughly 65% land on capital purchase, 15% on capital purchase + green loan blend, 10% on operating lease for covenant reasons, and 10% on PPA. PPA is the right answer for a meaningful minority of projects but not the majority. The decision tree above keeps the conversation grounded.

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