Solar Power Purchase Agreements

Solar panel technician holding a contract for a customer to sign

Solar power is becoming increasingly popular these days. Private residences and commercial establishments now recognize the advantages of solar power, namely its sustainability and cost-efficiency. However, even with the federal solar tax credit, owning a solar power system can be costly to some.

To help promote the use of solar power, companies and the government have various programs to make purchasing a solar power system easier. A solar power purchase agreement is an option for those who cannot afford the upfront payment of a solar power system.

A power purchase agreement, or PPA, is a form of solar financing that commonly used in renewable energy. The developer provides the equipment and supplies the buyer with a certain amount of energy at an agreed price over a certain period of time.

A solar power purchase agreement or PPA is similar to a Solar Lease, wherein the developer retains ownership of the solar equipment. The main difference is the product or service that the buyer is paying for. With a Solar Lease, the buyer pays to rent the solar equipment, while in a Solar PPA, the buyer only pays for the energy they consume. Solar power purchase agreements are also significantly longer, as some can last up to 25 years.

Two men discussing solar panels
Sun rays shining on solar panels

Solar power purchase agreements can be helpful to any entity or individual, whether private or public that is looking to take advantage of solar power without taking responsibility for the equipment. Solar panels provide a sustainable and cost-efficient source of electricity. This makes a solar power purchase agreement worthwhile to a range of individuals and establishments.

That said, one key consideration when choosing between a PPA and a solar purchase option such as a solar loan, is whether or not you would be able to benefit from claiming the Federal Solar Tax Credit. With a PPA, the tax credit is claimed by the company that owns the equipment with it’s value passed to the consumer through the solar electricity rate. This makes the PPA especially an especially beneficial option for homeowners without much federal tax liability.

Solar power purchase agreements play a significant role in developing solar power. With the advancement of technology, solar energy is becoming more popular. Solar PPAs create a more conducive setting for its development.

  • 1. Adoption: Through competitive prices and long-term contracts, a solar power purchase agreement or PPA makes solar power more accessible and helps in its adoption and expansion.
  • 2. Revenue stability: A power purchase agreement’s length provides developers with a stable and predictable revenue stream. This helps developers get financing and investors.
  • 3. Risk reduction: The fixed price of solar PPAs reduces the risks associated with renewable energy projects. Developers are ensured against the volatility of the market price of solar power.
  • 4. Government targets: Solar power purchase agreements promote the use of solar power and help reach the target set by local governments. It also helps in regulating and monitoring compliance with solar power standards.

Solar power purchase agreements offer several advantages, making them attractive to businesses and establishments.

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  • 1. Cost-efficient: A solar PPA gives buyers access to solar power without the need to pay the upfront cost of a solar power system.
  • 2. Price stability: The long-term contracts of solar PPAs protects buyers from volatile energy market fluctuations by locking their rates.
  • 3. Third-party ownership and maintenance: A solar power purchase agreement relieves the buyer of the upkeep of a solar power system. The design, installation, and maintenance of the system are handled by the third-party developer.
  • 4. Performance Guarantees: Many providers will guarantee performance of the system up to a certain threshold so homeowners are protected if the system is down for a period of time and not producing electricity for the home.
Solar panels on top of a roof

Identifying your need before entering a solar power purchasing agreement is important, as a solar power purchasing agreement is imperfect. There are situations wherein it may be a disadvantage to the buyer.

  • 1. Long-term commitment: True, locking the rate of the power generated protects the buyer. However, it also limits the buyer as their energy needs can change during the length of the agreement.
  • 2. Price volatility: Locking the price eliminates the chance of the buyer being able to cut costs when the market price decreases. The buyer may end up paying more than the prevailing market price.
  • 3. Exit barriers: There can be circumstances, such as financial problems, wherein a buyer may need to terminate a PPA before the contracted term. Prematurely terminating a PPA can be difficult and may have penalties.
  • 4. Provider risk: Buyers must assess the reliability of their third-party developer or provider before entering a solar power purchasing agreement because there is a possibility that the provider may default or fail to supply the buyer’s needs.

One of the most significant advantages that makes solar power attractive is how much savings you can get. After you start using solar power, you will notice your electricity bill decrease.

To compute your savings, you will need to know your electricity consumption and the price. For example, if your annual consumption is 10,500 kWh at 12 cents, you multiply these to get your total expense. In the example, the total is $1,260 per year.

Next, determine how much power your solar panels generate and deduct that from your total consumption. For example, if your solar panels can generate 10,000 kWh, you have 500 kWh left over. Multiply the remaining kWh, 500 in the example, with the cost per kWh. If at 12 cents, that would be $60 per year. This is the amount that you need to pay for the electricity you get from the grid.

Lastly, deduct the price of leftover kWh from your annual electricity expense. Using the values in the example, that is $1,260 less $60, making your yearly savings $1,200.

A woman reviewing her utility bill

A solar power purchase agreement supports and facilitates the purchase of solar power. It is pretty flexible to accommodate and adapt to the buyer’s needs. In general, there are three common types of power purchase agreements.

As the name suggests, an on-site PPA is found within the buyer’s property. For example, a third-party developer will install the equipment inside the buyer’s premises. The equipment remains inside the location and is maintained by the developer during the length of the power purchase agreement.

An off-site PPA takes solar power to a whole new level, providing power to a facility located elsewhere. This is ideal for buyers who do not have space within their premises or those who do not have a location ideal for solar power generation. To do this, the equipment is installed in a different place, and the electricity generated is injected into the grid. Buyers still consume grid electricity but offset their consumption by supporting the third-party developer or provider.

A Green Tariff is a specialized arrangement offered by utilities or electricity providers to their customers who want to purchase renewable energy. It allows customers to support and receive electricity from renewable energy sources, even if they are unable to generate renewable energy on-site or directly procure it from off-site projects.