An Overview of Power Purchase Agreements (PPAs)

This article discusses the basic foundations of Power Purchase Agreements (PPA) and also provides examples pros and cons associated with this financing strategy.  

Understanding Solar Power Purchase Agreements

Overview

A Power Purchase Agreement (PPA) is a popular financial model that allows property owners to benefit from solar energy without the need for a large upfront investment. Under a PPA, a third-party provider installs, owns, and maintains a solar system on the client’s property. The client then purchases the electricity generated by the system at a fixed or variable rate, which is often lower than the local utility’s rates. PPAs typically span 10 to 25 years, giving clients predictable energy costs over the long term.

One of the biggest advantages of a PPA is that it eliminates the need for the property owner to bear the installation and maintenance costs. Since the provider owns the system, they are responsible for upkeep, repairs, and monitoring, allowing clients to enjoy the benefits of solar power without the headaches. Additionally, since the solar provider can claim tax credits and renewable energy incentives, the overall project costs are lower, which can be passed on as savings to the client. However, it’s important to note that because the client doesn’t own the system, they miss out on directly receiving tax credits and incentives.

PPAs are not without drawbacks. Some agreements include price escalators, meaning the cost per kilowatt-hour may rise slightly each year, which can reduce the savings over time. Clients are also locked into a long-term commitment, which can be a disadvantage if their energy needs or circumstances change (e.g., they get rid of their hot tub or electric vehicle and their electricity consumption significantly decreases). At the end of the PPA term, clients may have to choose between purchasing the system, renewing the contract, or having it removed.

Pros

• No upfront costs: Clients can install solar systems without making a large capital investment.
• Lower energy bills: Clients typically enjoy reduced electricity costs compared to utility rates.
• Maintenance-free: The third-party provider is responsible for system maintenance, monitoring, and repairs.
• Predictable energy costs: PPAs provide long-term cost predictability, with fixed or variable rates often lower than traditional energy costs.
• Tax credit transfers: The solar provider benefits from tax credits, which lowers overall project costs and can reduce the client’s electricity rates.

 

Cons

• Lack of ownership: The client does not own the solar system, meaning they don’t benefit from direct incentives like tax credits or rebates.
• Price escalators: Some PPAs have annual price increases, which may reduce potential savings over time.
• Long-term commitment: A typical PPA lasts 10-25 years, which may limit future flexibility, especially if energy needs change.
• End-of-term options: Clients may have limited choices at the end of the agreement, including purchasing the system or renewing the contract, which could involve additional costs.

 

Ideal Client

• Limited upfront capital: Ideal for clients who want solar energy but cannot afford or prefer not to invest in the system upfront.
• Looking for energy savings: Clients focused on reducing monthly energy bills without the responsibility of owning the system.
• Tax-exempt organizations: Nonprofits, schools, and government entities that can’t benefit from federal tax credits or depreciation may find PPAs advantageous, as the solar provider can claim the tax incentives*.
• Long-term site usage: Businesses or homeowners who plan to stay in their location for at least 10-25 years and are comfortable with a long-term agreement.
• Minimal maintenance interest: Ideal for clients who do not want to deal with maintenance, repairs, or system performance management.
• Flexible with ownership: Clients who are not concerned about owning the system or capturing the full financial benefits but are interested in immediate savings.

Summary

In summary, PPAs are an attractive option for those who want to lower their energy bills without upfront costs. They are particularly ideal for organizations like nonprofits, schools, and government entities that cannot take advantage of tax credits or depreciation,* but still want to benefit from clean energy. Businesses or homeowners who plan to remain in their current location for the long term and do not want the responsibility of system ownership can also benefit from this model. By providing low-cost, maintenance-free solar energy, PPAs offer a flexible solution for clients looking to go solar without any upfront investment or ownership responsibilities..

*It is now possible for some non-profit organizations to utilize the solar ITC through the “Direct Pay” option of the Inflation Reduction Act.  However, these organizations typically still cannot utilize depreciation.