Solar Power Purchase Agreement Overview
A Solar Power Purchase Agreement (PPA) is a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its property and purchases the system’s electric output from the solar services provider for a predetermined period.
Typically the period of time is 12 to 15 years. This financial arrangement allows the host customer to receive stable and lower-cost electricity than from their usual utility provider. The solar services provider or another party acquires valuable financial benefits such as tax credits, depreciation value and income generated from the sale of electricity to the host customer.
With this business model, the host customer buys the services produced by the PV system (energy) rather than the PV system itself. This framework is referred to as the “solar services” model, and the developers who offer PPAs are known as solar services providers (ProVision Solar).
PPA arrangements enable the host customer to avoid many of the traditional barriers to adoption for non-profit entities looking to install solar systems: high up-front capital costs, lack of tax incentives and system performance risk. In addition, PPA arrangements can be cash flow positive for the host customer from the day the system is commissioned.
At the end of the agreed upon PPA term, you may do one of three things:
- Renew the solar services agreement for an additional two years
- Purchase the solar system at Fair Market Value—this can be financed!
- Have ProVision Solar remove the solar system
A host customer agrees to have solar panels installed on its property and signs a long-term contract with the solar services provider to purchase the generated power. The purchase price of the generated electricity is typically at or slightly below the retail electric rate the host customer would pay their utility service provider. PPA rates can be fixed, but they often contain an annual price escalator in the range of one to three percent to account for system efficiency decreases as the system ages, inflation-related cost increases for system operation, monitoring, maintenance, and anticipated increases in the price of grid-delivered electricity. A PPA is a performance-based arrangement in which the host customer pays only for what the system produces.
The solar services provider functions as the project coordinator, arranging the financing, design, permitting, and construction of the system. The solar services provider purchases the solar panels and inverters for the project from a manufacturer who provides warranties for system equipment.
The installer will design the system, specify the appropriate system components, and will perform the follow-up maintenance and monitoring on the PV system for the term of the agreement.
An investor provides equity financing and receives utility incentives, federal incentives, and state tax benefits for which the system is eligible. Under certain circumstances, the investor and the solar services provider may together form a special purpose entity (an LLC) for the project to function as the legal entity that receives and distributes to the investor payments from the sale of the system’s tax benefits and kWh output.
The Power Purchase Agreement is a path to ownership for non-profits. After five years, you may buy the PV system at a discounted price.
|Benefits & Challenges of PPAs|
|Benefits for Host Customer||Challenges for Host Customer|
|No upfront capital cost.||More complex negotiations and potentially higher transaction costs than buying PV system outright.|
|Predictable energy pricing.||Administrative cost of paying two separate electricity bills.|
|No system performance or operating risk.||Understand trade-offs related to ownership.|
|Project will be cash flow positive from day one.||Roof area for the PV System may not be available for other purposes during term.|