Solar Power Purchase Agreement (Solar PPA).
A Solar Power Purchase Agreement (Solar PPA) is a long-term contract to purchase the electricity that is generated by solar panels installed on your premises. The agreement is between a solar retailer (or generator) and a purchaser (or off-taker) for the purchase of electricity. Electricity is generated by the solar PV system and is charged at a kWh rate for the total production of electricity by the solar panels or by the site consumption. The Solar PPA is known as either a Production PPA or a Consumption PPA. The agreement is typically between 7 to 30 years and usually has an annual price increase for the duration of the agreement. The agreement has no upfront cost, however, the purchaser needs to purchase the kWh as agreed in Solar Power Purchase Agreement. Solar PPA is suitable for:
- Solar only projects
- Solar and Battery Storage projects
- Off-Grid Solar, Battery Storage and Diesel Generator projects
Are Solar PPA worth it?
The major benefit of a solar power purchase agreement is that you get a guaranteed low rate for electricity – with zero capital outlay. You also have zero operational risk as the responsibility for maintaining and servicing the solar system is borne by the commercial solar PPA provider. The solar power system installed at your premises will be owned by the solar PPA provider until the end of the solar PPA term when ownership transfers to your business.
Essentially, a solar PPA is a contract between your business and the solar PPA provider to purchase solar energy at a rate that is lower than buying it from the main electricity grid.
A power purchase agreement for solar is a great way to lock in a predictable, guaranteed low rate for electricity over a long period – typically 10-20 years.
How does a PPA work?
It’s important to be aware that a solar PPA covers your electricity costs for daytime power usage only. When the sun goes down, your business will have to purchase electricity from the grid – this will not be at the same low rate as the PPA agreement.
The rate for night-time grid electricity can be negotiated on your behalf by the solar PPA provider, or directly with the electricity retailer of your choice.
How long are Solar PPAs for?
The term length of most commercial solar power purchase agreements ranges from 7 years to 30 years. However, both shorter and longer terms for solar PPA can be negotiated, depending on your business requirements.
Advantages of a Solar Power Purchase Agreement
There are many advantages of setting up a solar power purchase agreement for your business, including:
- Zero upfront cost
- Cashflow positive from day 1
- Predictable energy pricing
- Can be 50% cheaper than grid electricity rates
- No system performance or operating risk
- No liability for system underperformance/malfunction
- No need to work with installers
- Electricity remains an operational expense
- Remain grid-connected – built-in redundancy
- Full O&M servicing + 24/7 remote monitoring
- Potential to easily expand and add new technologies
- Reduce your business’s carbon footprint
What types of businesses benefit from a solar PPA?
A wide range of businesses and organisations can benefit from a solar PPA – for example commercial enterprises, schools, universities, large electricity users of any type who like the idea of going solar but don’t want to pay anything upfront.
Solar PPAs will appeal to businesses and organisations that:
- Want to lock in their energy costs at a guaranteed low fixed rate.
- Want to avoid the long-term risk of owning and operating a solar system.
- Prefer an off-balance sheet asset.
- Are committed to cutting their carbon footprint.
Business benefits of a solar PPA vs buying solar panels outright
Here’s a comparison of the plus points of a solar PPA compared to outright purchase of a solar system.
|Solar PPA||Outright purchase of solar power system|
|Use of capital||No capital outlay||Significant capital outlay|
|Financial reporting||Off-balance sheet||On-balance sheet|
|Payback period||Instant||Measured in years|
|Electricity bill savings||Variable|
|Predictable rate for daytime electricity||Yes||No|
|System maintenance||Responsibility of PPA provider||Responsibility of system owner|
|System monitoring||Responsibility of PPA provider||Responsibility of system owner|
|Solar panels cleaning||Responsibility of PPA provider||Responsibility of system owner|
|Risk of system failure||Borne by solar PPA provider||Borne by the system owner|
|Insurance of solar system ||Responsibility of PPA provider||Responsibility of system owner|
|Liability for any damage caused by system malfunctioning||Responsibility of PPA provider||Responsibility of system owner|
|Inverter replacement after 10 years (approx.)||Cost covered by PPA provider||Cost incurred by system owner|
|Amount of power generated by solar system||Fully guaranteed||Not guaranteed|
|Price per kilowatt hour of electricity||During sunshine hours:|
|During sunshine hours:|
|Main electricity grid is back-up power supply||Yes||Yes|
|Administration / staff time||No staff time required to maintain system – this is carried out by solar PPA provider||Staff time required to:|
|Reduction in business’s carbon footprint||Yes||Yes|
How to get a solar PPA that’s right for your business
There are a few potential pitfalls to avoid when negotiating a solar PPA for your business. Here’s a summary of what to watch out:
|What to negotiate for||What to avoid|
|Own system outright at end of PPA period – without any additional payments||Balloon payment – i.e. a final payment at the end of the PPA term. It’s like paying for the system twice.|
|Insist on a consumption-based PPA pricing structure – not a production-based structure.||Production-based PPA pricing structure|
|Fixed price or CPI linked||CPI linked|
|Term of PPA||Don’t accept a PPA term that doesn’t fit your business|
Solar PPAs versus a solar lease
There are many similarities between solar PPAs and solar leases; basically they are just different forms of solar financing.
The main differences are:
With a solar lease, you pay a flat monthly fee for the solar system which should be less than what you were paying on your monthly electricity bills. For example, if your business was paying $2,000 a month for electricity, you’d be looking for a solar lease that was less than $2,000.
In contrast, with a solar PPA you pay a guaranteed price per kilowatt of electricity produced by your solar panels (although you can sometimes negotiate solar PPA arrangements where the price you pay per kilowatt hour is based on consumption, not production). This price will be lower than the price per kilowatt hour you pay for grid electricity. For example, if you pay 20 cents per kilowatt hour for grid electricity, your solar PPA agreement should be for less than this amount.
Another difference between solar leases and solar PPAs is their duration. Solar leases can be as short as 3-5 years, whereas solar PPAs typically are at least 10 years in duration, sometimes as long as 30 years.
Solar financing. What’s right for your business?
How do you work out which is right for you – a solar lease or solar PPA?
With years of experience in commercial solar and solar financing, we have the skills and expertise to find the best solar PPA or solar lease for your business.
Start the ball rolling. Talks to our solar experts about how to cut your electricity costs with a solar financing solution that’s cashflow positive from day 1.