A Solar Power Purchase agreement is a special type of financial agreement in which a third-party developer who owns and operates a photovoltaic system (also known as a PV system) leases solar energy to a customer. The customer purchases the entire system’s electric output from the solar energy provider. This agreement allows the host to receive renewable energy (electricity) which is not only reliable and affordable but also gives them the opportunity to help the environment and reduce their ecological footprint. Solar PPA also benefits solar service providers who, in return, receive financial benefits like tax credits as well as extra income from selling solar energy. The customer signing the agreement purchases power from the developer at a much lower cost than is typically offered by the local utility company. The developer then receives extra income from the sale of this electricity.
A solar PPA is a type of business model that allows customers to avoid potentially costly and complicated challenges they would normally experience with normal on-site solar system installations. These challenges include things such as high capital costs, performance risks, maintenance, and more. When a host signs a solar PPA, a developer is responsible for arranging the financing, installation, permitting and design of the solar energy system on a host’s property at a significantly reduced cost.
Solar PPA’s range anywhere between 7 and 25 years depending on whether it is a residential or commercial agreement. The developer is the one responsible for the maintenance and operation of the system for the entirety of the agreement. Once the PPA contract expires, the customer is given the option of extending the PPA. They also have the option of removing the system entirely or purchasing the system from the developer.
How Do Solar PPAs Work?
When a customer decides to sign a solar PPA, they agree to have solar panels installed on their property. This involves signing a long-term contract with a company that provides solar services. The customer who decides to sign the agreement typically purchases the solar electricity either at or slightly below the regular electric rate they would pay for a regular provider. There are two types of terms a customer can agree to a fixed escalator plan or a fixed price plan.
Fixed Escalator Plan
A customer’s price raises each year at a predetermined percentage (typically 2 to 5 percent) to account for inflation and maintenance costs. This predetermined rate is usually lower than most projected utility rate increases.
Fixed Price Plan
A customer pays the same price throughout the duration of the PPA. This saves customers money as utility rates increase over time.
What Happens after I Sign My Solar PPA?
One of the great things about a Solar PPAs is that they are performance-based agreements. This means that a customer pays only for what their system produces. The company providing the solar services arranges and takes care of the permitting, finance, design, operation, and construction of the entire system. They also take care of purchasing the solar panels from PV manufacturers and install the system using in-house installers or third-party installers.
Once a customer signs a contract, installation of their solar panels is usually completed within three to six months. The service provider provides the customer with the connection from the PV system to the grid of the solar system. In the event that a system produces less than the property’s electric demand, the provider will continue its electric service. Depending on the state the customer is located, they may be credited for the excess electricity used on site by the PV system.
What Are the Benefits of a Solar PPA?
There are many different benefits of Solar PPAs which make them a very good option for solar customers (and developers) who are looking for ways to save money and reduce their ecological footprint.
PPAs pose very limited risk: because the developer is the one responsible for the system’s performance and operating risks, the host customer has very limited risk.
Tax credits: developers can use tax credits to reduce the amount of their system costs.
Low energy costs: solar PPAs are advantageous because they provide customers with fixed electricity costs for the entirety of their agreement. The two options available (the escalator plan and the fixed price plan) are great options because the costs are typically much lower than utility prices, saving customers money even when utility prices rise.
Low or no upfront capital costs: because developers are the ones who are responsible for upfront costs (installation, sizing, etc.) the customer purchasing the solar energy can use the energy almost immediately, saving them money.
Increased property value: solar PV systems can potentially increase the property value of a residential home. This is because solar PPA agreements are long-term agreements and can be transferred when someone else purchases a property from a homeowner.
Other benefits of a solar PPA include:
- You only pay for the power you use.
- A solar provider installs solar panels on your home. The solar provider provides the panels and owns them. You do not have to worry about maintenance or doing the installation on your own.
- Electricity is purchased at a predetermined and discounted rate.
What Are the Challenges of a Solar PPA?
Although there are many benefits to solar PPAs, there are also a few challenges which may present themselves to host customers.
- Customers could face higher property taxes if their property value is reassessed.
- Solar PPAs can often be complicated negotiations which can result in higher transactions costs.
- Customers may not be able to make certain changes to their property if it could affect the performance of the system or hinder access to it.
- There is the possibility that a customer may have to pay two separate electricity bills in the event that the system goes in excess.
Is a Solar PPA Right for Me?
A solar PPA is the right choice for you if:
- You want to save money
- You want to use solar energy without having to worry about installation and maintenance
- You want to save money immediately
- You want to lock in your energy costs
- You want to reduce your ecological footprint
You want a more hands-off approach to solar energy (the developer providing you with the PPA will take care of everything for you—from installation to maintenance and more)