Solar Power Purchase Agreements: What exactly is a solar power purchase agreement (PPA)

Solar Power Purchase Agreements

A solar power purchase agreement (PPA) is a financial contract in which a developer arranges for the design, permitting, financing, and installation of a solar energy system on a customer's property for little or no cost. The developer sells the generated power to the host customer at a fixed rate that is often lower than the retail rate of the local utility. This lower electricity price serves to offset the customer's purchase of grid electricity, while the developer obtains revenue from these sales of electricity, as well as any tax credits and other incentives created by the system. PPAs normally last 10 to 25 years, and the developer is responsible for the system's operation and maintenance for the term of the agreement. A client may be allowed to extend the PPA contract period, have the developer remove the system, or purchase the solar energy system from the developer at the conclusion of the PPA contract term.

The Advantages of PPAs for Solar Customers

There are no or low upfront capital expenditures because the developer covers the costs of sizing, acquiring, and installing the solar PV system. The host customer can embrace solar with no upfront expenditure and start saving money as soon as the system is operational.

Reduced energy costs: Solar PPAs, which are structured in one of two ways, give a set, predictable cost of electricity for the duration of the agreement. The price the consumer pays climbs at a predefined rate under the fixed escalator plan, often between 2% and 5%. This is frequently less than the predicted increase in utility prices. The fixed price plan, on the other hand, keeps a steady price throughout the PPA term, saving the consumer more money as utility rates climb over time.

Risk is limited because the developer is in charge of system performance and operational risk.

Better utilisation of available tax credits: Developers are often in a better position to use available tax credits to lower system costs. Municipal hosts and other public bodies, for example, would not be able to take advantage of the Section 48 Investment Tax Credit if they did not have taxable income.

Potential increase in property value: It has been demonstrated that installing a solar PV system increases the value of a residential property. Because of the long term nature of these agreements, PPAs can be transferred with the property, allowing customers to invest in their house at little or no expense.

Policy Adoption and Market Adoption

PPAs allow the host customer to save the upfront capital costs of establishing a solar PV system while also streamlining the procedure. However, in some areas, the PPA model faces regulatory and legislative obstacles that would require developers to be regulated as electric utilities. A solar lease is a type of third-party financing that is comparable to a PPA but does not require the sale of electricity. Customers instead lease the equipment as they would a car. In both scenarios, a third entity owns the system, while the host consumer reaps the benefits of solar with little or no upfront investment. These third-party financing solutions have fast become the most popular way for customers to benefit from solar energy. Colorado, for example, entered the market in 2010, and by mid-2011, third-party installations accounted for more than 60% of all residential installations, rising to 75% in the first half of 2012. This increased tendency can be seen in all states that have implemented third-party finance arrangements.

Considerations for PPA

Solar renewable energy credits (SRECs) demonstrate that a specific amount of power was generated utilising solar energy. They are often purchased and sold by load serving companies (typically regulated utilities) in order to meet state-level renewable energy mandates. SRECs are also used by consumers who purchase them freely for marketing or other purposes. SRECs are often owned by the developer in PPAs. When engaging into a PPA, it is critical for a customer to understand who owns and can sell the SRECs generated by the PV system, the risks associated with SREC ownership, and the tradeoffs in terms of PPA price.

How to Invest: While both third-party financing schemes have various advantages, acquiring a PV system outright offers its own set of advantages. Anyone thinking about building a solar PV system should look into all of the available financing alternatives to find the best fit.

Site enhancements: While the developer is responsible for the installation, operation, and maintenance of a solar PV system, the host customer may need to make investments in their property to support the installation, reduce installation costs, or comply with local regulations. This could include things like roof repairs or pruning trees that shadow the PV system.

Higher property taxes: While a PV system may help to improve the property value of the site, there is also the possibility of a rise in property taxes when the property value is evaluated. Different states, however, have different policies in place when it comes to potential property tax increases.

You can read more about how Bigwit Energy can help you install solar on your premise on PPA basis on RESCO or BOOT model here.