What is a Solar Power Purchase Agreement (PPA)?
A solar power purchase agreement (PPA) is a popular financial agreement for businesses. PPAs allow a developer to arrange for the design, permitting, financing, and installation of a solar energy system on a customer’s property at little to no upfront investment cost to the customer. It’s common for developers to sell the power generated to the customer at a fixed rate. This fixed rate can be lower than the local utility’s retail rate,and therefore can save customers money without having to put down any capital upfront.
The fixed rate can help offset the price of the customer’s purchase of electricity from the grid, and it also allows businesses to create better budgets for electricity use by removing the risk of fluctuating utility rates. The developer will take the income from the sales of electricity, and will also receive incentives from the system, such as federal or state tax credits. PPAs typically see lifespans from 10 to 25 years. For the duration of the agreement, the developer is responsible for the operation and maintenance of the system. At the end of the contract term for the PPA, a customer has the option to either extend the PPA, choose to have the developer uninstall the system, or purchase the complete solar PV system from the developer.
Benefits of PPAs to Solar Customers
- Zero or low upfront capital costs: The developer is responsible for the initial costs of sizing, procuring, and installing the solar PV system, as well as the costs for any operations and maintenance the system may require. The developer will pay the cost to allow the customer to adopt solar energy as a source of power for their business. This allows the customer to bypass the initial investment and to start saving money right away by utilizing their new solar energy system.
- Reduced energy costs: Solar PPAs provide a fixed, predictable cost of electricity for the designated time of the agreement. The cost are designed in two ways.
- The fixed Escalator Plan – the price the customer pays rises at a predetermined rate over time, typically between 2% – 5%. This is often lower than projected utility rate increases.
- The fixed Price Plan – the price will be constant throughout the term of the PPA. This will save the customer even more as utility rates rise over time.
- Limited risk: System performance and operating risk is the responsibility of the developer.
- Better leveraging of available tax credits: In most scenarios, developers can utilize available tax credits to reduce system costs in ways that the customer could not. For example, municipal hosts and other public entities with no taxable income would not be able to take direct advantage of the Section 48 Investment Tax Credit.
- Potential increase in property value: A solar PV system has been shown to increase value to residential and commercial properties. Those agreements with a longer duration allow the PPAs to be transferred with the property. Depending on the system setup, this may not be feasible for all commercial facilities.
Market Adoption and Policy
PPAs provide a way to avoid the initial capital costs of installing a solar PV system. PPAs allow customers to experience a simple setup and turn-key use. In some states, however, the PPA model faces regulatory and legislative challenges that would regulate developers as if they were electric utilities. A solar lease is similar to a PPA in that it is another third-party financing option, but a solar lease does not involve the sale of electric power. Customers lease the system in the same way they would lease a car. In both cases, the system is owned by a third party, and the customer will have the benefits of solar with little or no initial costs.
These third-party financing models are a popular way for customers to obtain the many benefits of solar energy, without the financial investment required to build and operate their own system. Colorado, for example, first introduced third-party solar financing the market in 2010. By mid-2011, third-party installations represented over 60% of all residential installations and continued to rise to 75% through the first half of 2012. This upward trend is evident throughout states that have introduced third-party financing models.
- Solar Renewable Energy Credits: SRECs show the amount of electricity that was produced using solar energy. They are typically bought and sold by load-serving entities (typically a regulated utility) to meet the standards that are corresponding to the state-level renewable energy standards. SRECs may be purchased by consumers for the purpose of reducing the overall carbon footprint of their business – a valuable marketing tool, in addition to the environmental benefits. In most Power Purchase Agreements, the developer owns any SRECs generated by the system’s energy production. When entering into a PPA, it will be important for a customer to inquire about the ownership of SRECs, who can sell the SRECs generated from the PV system, the risks associated with SREC ownership, and the tradeoffs with respect to PPA price.
- How to finance a solar PV system: each third-party financing model has many benefits to consider. Any customer considering installing a solar PV system should consider all available financing options, and choose the one that best fits their business goals and capabilities. Here at REC Solar, we analyze businesses of all sizes on a daily basis, and we deliver tailored solar financing recommendations for our customers.
- Site upgrades: The developer is responsible for installation, operation, and maintenance of a solar PV system. The host customer may consider making an investment in their property that would provide support for the installation of the system or lower the cost of installation, or to comply with local ordinances. These investments may include rooftop repairs or trimming trees that could interfere with the solar energy production of the PV system.
- Possible increase in property taxes: A PV system often increases the site’s property value. However, there is also a potential risk of increase in property taxes. When a property is assessed, depending on which state the customer is in, there may be certain policies in regards to property tax increase to consider.
Curious if PPA agreements are right for your business? Speak with a Solar Finance Expert today.