Power Purchase Agreement
One of the largest barriers to installing a solar PV system is the upfront capital cost required to pay for the solar panels and their installation. There is, however, a way around this problem.
Power purchase agreements (PPAs) have become a common way for large energy users to purchase PV because this financing structure keeps costs low for energy users. A PPA involves three parties: the host, the vendor, and a financier.
The host leases roof or ground space to a financier for a nominal fee, who then uses a vendor to install a solar PV system on the site. The financier owns the system for the life of the PPA contract, which is usually 15-20 years, and the host purchases all of the solar energy from the financier. In the PPA contract, the energy price is fixed at an agreed-upon rate. The financier also receives all federal and state incentives, passing those savings along to the purchaser. Often, a PPA will include a provision that allows the end-user an option to purchase the system at fair market value at the end of the contract period.
PPAs have become remarkably popular in the U.S. in recent years because they offer a number of advantages. Since the financier assumes all costs and responsibilities of ownership of the PV system, the host eliminates the capital cost of PV and minimizes its risks. Instead of having to approve a capital expenditure, the purchaser can simply pay for the electricity as it is generated. The host does not have to have the internal capacity, manpower or budget to perform system monitoring and maintenance. The PPA structure allows the host to stay out of the energy production business.
PPAs also allow non tax-paying entities to benefit from the federal incentives. Since the financier owns the system, they are able to claim those incentives and pass along the savings to the host in the form of a lower price for the electricity.
Finally, a PPA offers predictability. PPA’s are used as hedges against rising energy costs, since the contract specifies the price of electricity per kilowatt-hour. At the same time, the investor can be assured of making a fair profit. Neither party is subject to rate changes or price spikes; including a PPA in its energy portfolio will help to insulate the host against increases in the cost of fossil fuels. In the event that the host purchases the system at the end of the PPA term, they can then obtain electricity for free for the remainder of the life of the system.