What are the benefits of a Power Purchase Agreement (PPA) for solar plants

Introduction to Power Purchase Agreements

Definition

A Power Purchase Agreement (PPA) is a long-term contract between a power producer and a customer, such as a utility, government, or company, where the customer agrees to purchase electricity at a predetermined price per kWh. PPAs are a popular financing mechanism for renewable energy projects, including solar and wind farms, as they offer numerous advantages for both parties involved.

For the power producer, a PPA provides a stable revenue stream due to the guaranteed long-term purchase of the electricity generated, ensuring that the investment in renewable energy infrastructure is financially viable. This stability is crucial for the development and expansion of renewable energy projects, as it reduces the financial risks associated with fluctuating energy markets.

On the other hand, customers benefit from reduced energy costs and increased sustainability. By locking in a predetermined price structure for electricity, customers can protect themselves against future energy price volatility, making it easier to budget for energy expenses. Additionally, by purchasing electricity generated from renewable sources, customers can significantly reduce their carbon footprint and contribute to environmental sustainability.

Overall, power purchase agreements (PPAs) play a vital role in promoting the adoption of renewable energy, providing financial security for power producers, and offering cost savings and sustainability benefits for customers.

What is a power purchase agreement for solar projects?

In the context of solar power, it is a financial agreement where a developer will install the infrastructure required to harvest solar power and then recoups the cost by selling that power to the customer at an agreed rate, which is usually lower than the average retail unit price. 

A Solar Power Purchase Agreement (SPPA) is a financial arrangement where a third-party developer owns and maintains a photovoltaic system, while the host customer purchases the system's electric output for a set period. This model helps the host customer benefit from stable, often lower-cost electricity and avoids upfront capital costs and other installation barriers. On top of the income received from the generated solar power, the developer may also receive incentives such as tax credits.

A typical PPA will last between 10 and 25 years, with the developer remaining responsible for the maintenance and operation of the infrastructure for the duration of the agreement. The length of the agreement can vary based on the specific terms agreed and may occasionally be shorter than 10 years, although 10-25 years is standard range for large-scale projects.

What is the difference between PPAs and leasing?

The main difference between Power Purchase Agreements (PPAs) and solar leasing lies in the structure of the financial agreement and the ownership of the solar system. Both are financing options for customers who want to install solar panels without upfront costs, but they work in distinct ways. Here's a breakdown of the key differences:

1. Ownership of the Solar System

• PPA: In a Power Purchase Agreement, the solar system is owned by the developer (or a third party). The customer doesn't own the solar panels but agrees to purchase the power generated by the system at a predetermined rate per kWh over a long-term period (typically 10-25 years).

• Leasing: In a solar lease, the customer also doesn’t own the system but rents the solar panels from the solar provider. The customer typically pays a fixed monthly lease payment for the use of the system, regardless of how much power the system produces.

2. Payment Structure

• PPA: With a PPA, the customer pays for the system's electric output generated by the solar system, usually at a lower rate than what they would pay their utility. The cost per kilowatt-hour (kWh) is usually fixed or subject to a small escalation each year.

• Leasing: With a lease, the customer pays a fixed monthly payment to the developer or leasing company, typically for the duration of the lease agreement. This payment is not tied to how much energy is produced by the solar panels. In other words, it’s a flat fee for using the system, regardless of energy output. Some lease agreements may include performance-based clauses or energy-based adjustments, although this is less common than in PPAs.

3. Energy Costs

• PPA: The customer benefits directly from any energy savings. Because the customer only pays for the electricity consumed.

• Leasing: The customer still pays a fixed monthly fee, it doesn’t fluctuate based on the energy consumption. 

4. Incentives and Tax Credits

• PPA: Since the developer owns the solar system, they are the ones that typically benefit from any available incentives, such as tax credits (e.g., the Investment Tax Credit (ITC) in the U.S.). This is one of the reasons the developer can offer lower electricity rates to the customer.

• Leasing: Similar to PPAs, the solar developer or leasing company typically claims any available incentives, not the customer. However, in some cases, the lease may be structured so the customer gets some benefits or lower rates due to the incentives.

5. Maintenance and Responsibility

• PPA: The developer is generally responsible for the maintenance, operation, and repair of the solar system. They handle everything from installation to monitoring the system’s performance.

• Leasing: In most solar lease agreements, the solar company also handles maintenance and repair of the system. The customer does not bear any maintenance responsibility, much like in a PPA.

6. System Performance

• PPA: Since the customer is paying based on energy generated, the developer has an incentive to make sure the system is well-maintained and performs at its best.

• Leasing: In a lease, the customer typically pays a fixed fee regardless of how much power is produced, so there is less incentive for the leasing company to maximize performance (though they still maintain the system to ensure it operates properly).

Advantages of PPAs for Solar projects

Here are a few of the advantages of power purchase agreements for solar projects.

Cost savings 

The upfront cost of installing a solar power system can be off-putting, especially when it will take a while for those costs to be recouped. PPAs allow hosts to enjoy the benefits of solar energy without the upfront cost. Not only does this help the host avoid the costs of setting up a solar PV system, but it also allows them to enjoy lower energy costs as soon as the system is up and running. It is useful to note that the host enjoys savings primarily on electricity costs, but the developer still owns the system and recoups its costs over time via the energy payments. The savings for the host depend on the structure of the PPA (fixed price vs. escalation rates).

Reduced carbon footprint

Adopting solar energy allows the host to reduce reliance on power generated by fossil fuels. This helps reduce their carbon footprint and improves sustainability efforts. This has an added benefit for businesses, as customers are always on the lookout for businesses making an effort to reduce their carbon footprint.

Fixed energy costs

Managing energy costs is tough, especially when prices are unpredictable. Power purchase agreements offer agreed-upon energy costs for the host, often at a competitive rate. This allows the host to easily budget for energy costs as they don't have to worry about market price fluctuations.

Operational resilience

The developer retains ownership of the solar PV system throughout the SPPA, making them responsible for its upkeep. This means the host does not have to worry about downtime or maintenance and can rely on the system to continue providing power. The developer will resolve any issues quickly to ensure their investment stays operational.

What are the key considerations when entering into a PPA?

There is no industry standard for power purchasing agreements, which means every SPPA is different, and the terms will depend on negotiations. While entering into a power purchase agreement has plenty of benefits for the host, there are some things that need to be considered to help you understand if it’s the right move for you or your business. 

Volume and length of agreement

PPAs are typically 10 to 25 years long, with an option to fix energy prices for shorter terms. For example, the SPPA could fix the unit price for five years and offer renegotiation at the end of that period. 

The volume of energy purchased is generally based on the customer's forecasted needs or agreed-upon capacity. This allows the developer to predict the revenue stream and see how it compares to the initial investment.

Pricing structure

As they offer an agreed-upon rate of energy cost, solar power purchase agreements are a great way to protect the host against fluctuations in the solar energy market price. However, the developer must offer a rate that protects them against market price changes. To do this, the developer will typically offer a fixed price per kWh with an escalator. The pricing structure of PPAs is adapted to the specific conditions of the local power sector, ensuring financial mechanisms align with market models.

The escalator is a clause within the contract that allows the PPA price to increase over time at a controlled rate, typically less than 3% per year. This still offers the host protection and stability but allows the developer to manage their prices in line with market price increases.

Growth rate for renewables in buyer's country

The growth rate of renewable energy will theoretically directly correspond with a decrease in energy prices in that country. So, if the predicted growth rate is high, there will be more clean energy available over time, reducing the value of the energy produced by the host’s system. Solar power price agreements will be structured with this in mind, with language that allows for price renegotiation in the event of a high growth rate.

What are Solar Renewable Energy Credits (SRECs)?

Solar Renewable Energy Credits (SRECs) represent the “green” value of the electricity generated by solar PV plants. SRECs are only available in certain states in the US.

SRECs are sold separately from the physical energy produced by the solar PV system and act as a certificate to prove that the energy being sold is actually renewable energy. PPAs are foundational for developing independent electricity generation assets, including large-scale renewable energy facilities like power plants.

1 SREC is awarded for every 1000kWh produced by the solar PV system, and utility companies buy them to prove that a certain percentage of their energy comes from renewable sources.

SRECs in a PPA are typically owned by the developer, but it is important to note that this can vary depending on the terms of the agreement. In some cases, the customer may have the right to purchase or claim SRECs, so it’s always important to clarify who owns SRECs and the tradeoffs SREC ownership means for the PPA price.

How can RatedPower help get your PV projects ready for PPAs?

If you’re looking to start a new solar PV project, power purchase agreements are a great way to bypass the extensive PV plant financing process. RatedPower can help you navigate an SPPA by giving you a clear understanding of what you need for a solar PV plant based on your requirements. Request a demo today to see how.