What is Solar PPA?
A Solar PPA is known as the Solar Power Purchase Agreement which is a special type of financial agreement wherein a third-party developer who owns, operates, and maintains the photovoltaic (PV) system make an arrangement with the host customers regarding the permitting, design, financing and installation of a solar energy system on a host customer’s property at a fixed rate that is lower than the retail rate of local electric utility. With that, a host customer agrees to site the system of its property and then purchases the system’s entire electric output from the provider of the solar power services for a fixed period.
This financial arrangement allows the host customer to not only receive renewable energy and stable low-cost electricity but it also gives them a chance to support the green movement to protect the environment and reduce the emissions of greenhouse gases. Furthermore, the customer who signs the Solar PPA may purchase power from the developer at a much lower cost as compared to the typical power being offered by the local utility.
On the other hand, the solar services provider or another party also receives valuable financial benefits from the Solar PPA, such as tax credits, other incentives and extra income generated from the sales of the electricity.
Solar PPA is typically ranging from 10 to 25 years depending on whether it is a residential or commercial agreement and the third-party developer must remain responsible for the operation and maintenance of the solar system within the duration of the agreement. At the end of the Solar PPA contract term, a customer has a right to extend the agreement, ask the developer to remove the system or choose to purchase the solar system from the developer.
How does Solar PPA work?
A host customer must agree and sign a long-term Solar PPA contract with the solar services provider to have solar panels installed on its property (residential or commercial), typically on its roof, and to purchase the generated power from the third-party provider. The host property can be either owned or leased. Take note that when it comes to leased properties, solar financing works best for host customers who have a long-term lease. The purchase price of the generated electricity is typically lower in cost than the retail electric rate that a host customer would pay on its utility service provider.
Solar PPA offers fixed rates but they often contain an annual price escalator ranging between 1 to 5 percent to account for the system efficiency decrease as the system also ages, inflation-related cost increases for system operation, monitoring, and maintenance; as well as anticipated increases in the grid-delivered electricity cost.
Since Solar PPA is a performance-based arrangement the host customer must pay only for what the system produces. The contract term of most SPPA is typically ranging from 6 years to as long as 25 years.
Whereas, the solar services provider or third-party provider who acts as the project coordinator will be responsible for arranging the financing, design, permitting, and constructing the solar system. The provider will then purchase the solar panels for the solar system project from a photovoltaic manufacturer, who provides warranties for solar system equipment.
Then, the installer will design the system by identifying the appropriate system components and will perform the follow-up maintenance over the lifespan of the PV system. In installing the whole solar system, the provider might use an in-house team of installers or might choose to have a contractual relationship with an independent solar installer. Once the Solar PPA contract is signed, the solar system installation will be completed usually in three to six months.
On the other hand, the investor will provide equity financing and to receive the federal and state tax benefits for which the system is eligible. For instance, the investor and the solar service provider can form a special purpose entity together for the project to function as the legal entity that receives and distributes to the investor payments from the tax benefits and system’s output sales.
The utility providing services to the host customer, will also provide an interconnection from the photovoltaic system to the power grid and still continues its electric service with the host customer to cover the periods when the system is only producing less than the electric demand of the sites. Although, some states offer net metering requirements in place to provide a crediting method for the customers who produce excess electricity on-site. Whereas most electric utility in some states credit excess electricity generated from the photovoltaic system, but this compensation varies significantly depending on each state’s policies.
Different Types of Purchase Agreements
There are many types of power purchase contracts, that involve different parties, terms and conditions. These are the homeowner, power company and solar equipment provider which includes investors and service technicians.
The standard electric purchase agreement for the homeowners fulfills two of the key deficiencies of many homeowners such as lack of expertise and lack of money.
Benefits of Homeowners
- System Maintenance – Many homeowners are lacking expertise, they don’t know how to fix photovoltaic systems and having a solar PPA will help them a lot.
- Generate Cleaner Energy – Solar-equipped homes generate electricity from cleaner and renewable energy.
- Saves Money – Households can save more money on energy bills by producing a portion of the energy they use in solar power systems than solely relying on local electric utilities.
- Solar Financing – A solar power purchase agreement provides solar financing. Some third-party solar investors are willing to provide zero-cost solar systems in exchange for ownership of the energy produced.
- Increase Property Value – Solar equipment can increase homeowners’ property values.
- Emergency Resource – During emergencies, this could be a life-saver since homeowners can easily tap into their own stored energy.
Benefits of Power Companies
- Increase in Supply – Power utilities can control the power purchase agreement rates by adding more suppliers when it is needed.
- Long-Term Agreement – The longer-term agreement assists with the proper allocation, rationing and financing.
Solar Equipment Provider
This includes investors and solar system service technicians.
Benefits of Solar Equipment Provider
- Equipment for Lease – Unused solar panels can be installed on rooftops. And, servicemen can maintain and repair the solar equipment as much as it is needed.
- Share Profits – By producing energy to be resold to homeowners, businesses and utilities, third-party investors can earn profits.
- Tax Incentives – tax incentives will ensue to these third-party solar investors.
Overall Benefits of Solar PPA to Host Customers
- Form low to no upfront capital costs – The service provider handles the upfront costs of sizing, procuring and installing the solar photovoltaic system. With this, even without any upfront investment, the host customer will be able to adopt the solar system and eventually can start saving money when the solar system becomes operational.
- Reduced energy costs – Since Solar PPA is providing a fixed, predictable cost of electricity within the duration of the agreement the host consumer can probably save energy cost per year. Under the fixed escalator plan, the customer payment will rise at a predetermined rate, typically between 2 to 5 percent. This offer is usually lower than the projected utility price increase. Whereas, the fixed price plan will maintain a constant price throughout the contract term of the Solar PPA, which will definitely save the customer’s energy costs as local utility cost rises over time.
- Limited risk – Since the service developer is the one responsible for system performance and operating risk, there will be no or little risk to host consumers.
- Better leverage of tax credits – Third-party developers are typically better positioned to utilize available tax credits in your area to reduce solar system costs.
- Potential increase in property value – A solar photovoltaic (PV) system has been shown to potentially increase residential property values. The long term nature of these agreements allows Solar PPAs to be transferred with the property, therefore it can allow the customers to invest in their home at little or no cost.
Challenges of Solar PPA to Host Customers
- There might be a potential increase in the customer’s property taxes if the property value undergoes the reassessment process.
- Site lease might limit the ability to make certain changes to a property which probably can affect the performance of the PV system and it can also hinder access to the system.
- It can cause more complex negotiations and will result in higher transaction costs than buying a photovoltaic system outright.
- There is a possibility that the host costumer may pay two separate electricity bills if the system does not meet 100 percent of the site’s electric load.
- Understand tradeoffs related to REC ownership/sale.
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