Is your organization considering going solar? Are you investigating different commercial solar financing options? A solar power purchase agreement (PPA) may be a viable choice.
Here are four questions organizations often ask about solar PPAs to help decide if this financing option is right for their needs:
- What is a solar PPA?
- What are the pros and cons of solar PPAs?
- What should you look for in a PPA provider?
- What pitfalls should you avoid in the PPA process?
What is a solar PPA?
A PPA is a financing arrangement that allows businesses, government agencies and educational institutions to purchase solar electricity with no upfront capital cost. You buy the energy, not the solar equipment. It’s a great way to get the benefits of solar without having to take on the responsibilities of being a solar system owner-operator.
A third-party PPA provider pays for the cost of a solar installation on or near your facilities (like a rooftop, parking lot or unused land). The provider takes responsibility for ownership, operation and solar panel maintenance. You simply enter into an agreement to purchase the electricity produced by the system at a predetermined rate per kilowatt-hour (kWh), the same unit of measurement as your standard utility bill.
A typical PPA agreement might run 20 to 30 years and may include a variety of purchase and renewal options. A pre-paid PPA (PPPA), with a large percentage of the PPA payments provided at the beginning of the agreement, is another variation of this funding method.
What are the pros and cons of solar PPAs?
There are both benefits and drawbacks to solar PPAs. Weigh the pros and cons against your organization’s priorities before deciding if a solar PPA is right for you.
Pros of solar power purchase agreements
- $0 capital investment: There’s usually no upfront cost involved in entering into a solar PPA.
- Immediate savings: You’ll see lower electricity bills from day one.
- Predictable energy costs: A solar PPA allows you to lock in low energy costs and protect your organization from unpredictable fossil fuel-based energy rates.
- No production or performance risks: Once a commercial solar system is up and running, there is always the possibility of issues arising that may cause downtime—such as severe weather damage to the solar array or a transmission outage. With a PPA (unlike an operating lease), if the system doesn’t produce energy, you don’t have to pay.
- No ongoing operations and maintenance (O&M) costs: A third party pays for the O&M of the solar system.
- Off-balance-sheet obligation: A solar PPA isn’t looked at as debt. It functions just like a regular utility bill, so it doesn’t tie up capital you could use for other investments.
- Early buyout option: Most PPAs include a buyout option that would allow you to buy the solar system before the end of the PPA term—usually at the end of year six or seven, as specified in the PPA contract.
- Corporate sustainability: By purchasing clean, renewable energy instead of using energy generated with fossil fuels, your organization can make a real difference for the environment and help set an example for sustainable business practices.
Cons of solar PPAs
- Cash is cheaper: In the long term, you will pay less and save more buying your own solar system with a cash purchase or capital improvement loan than with a PPA.
- A lease may make more sense: Depending on your particular situation, a solar operating lease may make more sense than a PPA. Solar leases have a lower cost of capital because the owner of the lease doesn’t take on performance risks like a PPA provider does. But because leases have shorter terms, your periodic payments would be higher than a PPA. At the end of the lease term, you usually have the option to purchase the solar system you’ve been leasing for a reduced price. In contrast, if you have the option to buy the solar hardware in your PPA, it’s usually priced at the higher of Fair Market Value or Termination Value (probably more expensive than at the end of a lease).
- Longer-term obligation: The previously mentioned early buyout option notwithstanding, with a PPA, you’re generally agreeing to purchase power for 20 or more years (as opposed to a typical solar operating lease of 7 to 10 years—or an outright purchase).
- No control of equipment: With a solar PPA, you don’t own the solar equipment, and you don’t maintain it, so you’re relying on someone else to choose high-quality equipment and keep it performing at peak efficiency.
What should you look for in a solar PPA provider?
As with any important long-term decision, you should assess multiple PPA providers before signing any agreement. Ideally, you’ll want to look for a PPA provider who:
- Does development and installation, using high-quality solar equipment and experienced project leadership and staff
- Is fully funded and financially backed by stable investors
- Has excellent long-term relationships with credible, high-quality manufacturers, suppliers and financial institutions
- Does its own operations and maintenance, including monitoring, system cleaning and rapid repairs
- Offers asset management, including billing, reporting, tax filing, etc.
- Has demonstrated longevity and will be around in 20 to 30 years to honor and maintain the PPA for its entire duration
- Doesn’t automatically recommend PPAs, but instead guides you honestly to the right solution for your organization—which may be a PPA, a lease, a cash purchase or another financial solution
- Seeks out all possible federal, state and local tax incentives and passes the savings on to you in a lower PPA rate
- Will remove the system at no cost to you at the end of the PPA—and will negotiate a new rate or let you buy the system at fair market value
What pitfalls should you avoid in the PPA process?
Look out for PPA providers who subcontract or farm out parts of the PPA arrangement (which typically includes financing, construction, O&M and asset management) to sub-par contractors, financiers and/or O&M providers—or companies that expect you to negotiate each piece separately on your own. The process will go much more quickly and smoothly (and have a far better outcome) if you work with one company that does it all and/or vets its partners carefully on your behalf.
You should also inquire about the type of solar technology that will be used for your installation. If your PPA provider uses inferior solar technology or substandard O&M, you may experience significant system downtime or a sharp drop in performance over time. Though you won’t have to pay when the system isn’t producing, you’ll be forced to buy energy from the grid at a higher rate to make up for it.
A solar PPA is one of several ways businesses and public entities can pay for solar. Weigh the pros and cons of solar PPAs carefully against your organization’s needs and priorities before deciding if a PPA is right for you. Then evaluate several PPA providers to ensure you find one that will be an excellent energy partner for decades to come.