There are different schemes under which you can access solar energy. The simplest one is acquiring the system by paying the upfront price, but you can also opt for a power purchase agreement (PPA). This is an easy and affordable option that allows you to reduce your carbon footprint and electricity expenses without paying the upfront cost for a photovoltaic (PV) system.
In this article, you will learn everything you need to know about a power purchase agreement.
Basics: What is a power purchase agreement (PPA)?
The power purchase agreement (PPA) is a service/financial agreement under which a customer or host agrees under a contract to purchase power at a set price from a third-party project developer, also known as solar service provider. The solar service provider takes care of the design, permitting, financing, and installation steps for the PV system on the property of the customer.
This agreement allows the customer to consume clean solar energy at a set rate pre-arranged by both parties. The developer, in turn, can access all available incentives for the installation of the PV solar system and profits for selling electricity to its customer. The rate at which the developer sells the electricity is stable and usually lower than that of the utility.
The PPA lasts from 10 to 25 years. After the contract for the PPA ends, there are several options the customer can choose from: Extend the duration of the PPA, buy the PV system from the developer, or have the project developer remove the system.
How does a PPA work?
There are several parties involved in a PPA, but the overall process is relatively simple.
The solar project developer is funded by several investors. The company finds a client and makes an offer, including details like the size of the system, cost of the electricity, duration of the term, and more. After the contract is signed, the whole process begins.
First, the project developer uses the money from the investors (or financing) to buy the PV modules and other required accessories from the solar equipment manufacturer. The developer then asks for permits and hires the installer company to set up the PV system at the chosen location.
After the installation is performed, the customer pays the developer for the electricity consumed at the set price. This saves money for the customer and reduces its carbon footprint. The project developer is in charge of monitoring the performance of the system and providing maintenance. When the term ends, the customer decides to either extend the contract, acquire the PV system, or end the contract.
Aside from understanding how the process works, it can be helpful to know the parties involved and learn their role in the process.
- Solar Service Provider or Project Developer: Company developing PPA projects. It is in charge of finding customers, selling them the solar service, arranging for the PV installation, caring for the system, and charging the consumer for the electricity consumed. It can also access the available federal and state solar incentives.
- Equipment Manufacturer: Manufacturer of PV modules and other PV equipment. Usually has an ongoing business alliance with the Project Developer.
- Solar Installer: Company specializes in the installation of PV systems, including certified electricians and other personnel. Installs PV systems for the project developer.
- Investor: Company action owners at the solar service provider company. They provide funding for the PV installation and receive their share of the revenue for the business.
- Customer or Host: Customer of the Solar Service Provide. It can be a government entity, business owner, or residential customer. It signs a contract to have a PV system installed on-site and pay for the electricity consumed.
- Utility: Provides electricity as usual to the customer if the on-site PV system does not generate enough power.
What are the benefits of PPAs?
PPA delivers many benefits to the main parties involved. In this section, we explain the most important benefits for project developers and the different types of customers of PPA.
Benefits for Project Developers
PPA is a bankable and low-risk business model that provides many benefits for investors and parties involved. These are the most important benefits seen by project developer companies.
- Tangible long-term revenue with regular incomes.
- The company creates long-term business relationships with customers.
- Investment is made in terms of profits and not risk, since the asset sold is a basic need and the system will generate power for the duration of the contract.
- The business model provides bankable projects.
- Aside from generating a profit, the project helps the environment by reducing greenhouse gas emissions.
Benefits for Electricity Consumers
Three types of customers sign a PPA: government entities, business owners, and residential customers. The following lists the most important benefits for each of these customers.
- Access to predictable/low-cost clean electricity for up to 25 years.
- Solar energy may cost less compared to acquiring a PV system upfront since government agencies cannot access solar tax incentives due to their tax-exempt status.
- Operating & maintenance responsibility is carried out by the project developer.
- No need to obtain permits or design the PV system.
- A stable electricity price ensures long-term budget certainty for the duration of the contract, with no up-front cost payment.
- Increased reputation as a green business.
- Can opt for a Green Business Certification.
- No need to deal with permits and design for the installation of the PV system.
- Save time & money in maintenance since this is the responsibility of the project developer.
- No need to pay an upfront cost for the PV system.
- Access to lower cost electricity compared to utilities.
- No Return-of-Investment (ROI) period for the PV system.
- Positive impact on the environment by lowering the carbon footprint of the house.
- Higher property value.
- No need to deal with obtaining permits to install the PV system.
- No need to worry about the maintenance or performance of the system.
Challenges of PPAs to developers and consumers
The main challenge for PPA electricity consumers and project developers is the state regulations and legislation that limit or ban third-party developers from selling electricity. These states grant this benefit exclusively to utilities, making PPA inaccessible. Until 2021, only 15 states in the U.S. allow PPA.
There are other additional challenges that project developers can face regarding incentives. For instance, the Federal Tax Credit is being decreased in the following years, which could make this business model slightly less profitable in a few years. Additionally, some states could also reduce local incentives, which is the case in California.
Get access to solar: Sign a PPA or build a plant outright?
To access solar energy, you can either sign a PPA or buy a solar system outright. It is important to weigh both options since each of them provides its pros and cons.
Acquiring a PV system outright delivers many benefits since you can access the Federal Tax Credit that reduces the overall cost of your PV system by 30% and also access other local incentives, fully owning your PV system for its 25 to 40 years lifespan. This also means you are not attached to the 1%-5% price escalator established in PPA contracts. Moreover, in the long term, purchasing a PV system can lead to far better savings than a PPA (under the right conditions). The downside is that you have to make a high upfront investment, ask for permits, monitor the performance of the system on your own, and care for its maintenance. In the end, the PV system becomes an investment and consequently, there can be some risks associated with it.
With PPA, you can have access to solar energy without making any upfront investment or having to worry about permits, maintenance, or even the performance of the system. The downside is that you will not own the system and hence your savings for solar will be much lower; the contract is limited to 10-25 years, and there is a price escalator attached to it. At the end of the day, the PPA is a risk-free solar alternative that will lead to some electricity savings in the long term.
Homeowners with a limited budget can be more benefitted from PPA since the electricity rate at which the contract will be established will be lower than your utility, and it is also clean energy that you can access without any hassle. Those with enough budget to make an investment in a solar system will have to weigh their options.
PPA as a tool for the solar industry and its impact on the U.S. energy transition
A power purchase agreement is not only a business model, but also a great tool that benefits the solar industry, solar project developers, and customers alike. This payment scheme makes the energy transition easier for the country .
The U.S. government is heavily committed to reducing the carbon footprint of the country, advancing from fossil fuel energy to clean energy. Back in 2015, PPAs were responsible for around 2 GW of the solar capacity in the U.S. By 2020, companies reported 10 times that capacity, up to 23.7 GW in corporate PPA, and even more shocking is that Washington D.C. signed a PPA for 73 MW for 15 years in 2022.