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What is a Solar Power Purchase Agreement

Jessica PirroJuly 9, 20193180

What Exactly is a Solar Power Purchase Agreement? 

A solar power purchase agreement (PPA) is a financial agreement where a solar company arranges for the design, permitting, financing and installation of solar panels property at little to no cost. The solar company will then sell the solar power that is generated to the customer who is hosting the solar panels at a fixed rate where the cost of solar energy is typically lower than the cost of energy that is coming from the local utilities retail rate. This lower cost of solar energy serves to offset the purchase of electricity that comes from the grid while the solar company is the one that is getting the money from these sales of electricity as well as any federal tax credits and other solar incentives that are generated from the solar-powered systems. Power purchase agreements usually range from 10 to 25 years and the solar company remains responsible for the operation and maintenance of the system for the duration of the power purchase agreement. At the end of the power purchase agreement contract term, a customer may be able to extend the power purchase agreement, have the solar company remove the solar-powered systems or choose to but the solar-powered system from the solar company.

Power Purchase Agreement Benefits

No Upfront Costs of Solar Energy

The first benefit that comes with power purchase agreements is the no upfront capital costs of solar energy. The solar company is the one who handles all of the upfront costs of solar panels, therefore the host customer is able to in terms ‘adopt’ solar panels and begin saving money as soon as their solar-powered system becomes operational.

Reduced Cost of Solar Energy

Solar power purchase agreements provide a fixed, predictable cost of solar energy for the duration of the power purchase agreements and are structured in one of two different ways. There’s a fixed escalator plan, which is when the cost of solar energy that the customer is paying will rise at a predetermined rate, which is typically between 2% through 5%. The cost of solar energy at a rising rate will typically be lower than the projected utility price increases. The fixed cost of solar energy plan, on the other hand, maintains a constant price throughout the entire term of the solar power purchase agreement saving the customer more as the utility prices rise over time.

Limited Risk

The Solar company is responsible for the solar-powered systems performance as well as the operating risk.

Better Leverage of Available Tax Credits

The solar company is typically in a better position to utilize the available tax credits that are available when you switch to solar-powered systems, to reduce the cost of solar energy. An example is when the solar panels host and other public entities that don’t have a taxable income who would otherwise not be able to take advantage of the Section 48 Investment Tax Credit.

Potential Increase In Property Value

A solar-powered system has been shown to increase the property value of a house. The long term nature of these agreements allows for power purchase agreements to be transferred with the property and will then provide solar panel customers with a means to invest in their home with little to no cost of solar energy.

Market Adoption 

Power purchase agreements provide a way to avoid the upfront capital cost on the installation of solar panels as well as simplifying the process for the solar panels host customer. There are some states where the power purchase agreement model faces regulatory and legislative challenges that would regulate developers as electric utilities. A solar lease is another form of third-party financing that is very similar to a power purchase agreement, but it doesn’t involve the sale of solar power. With a solar lease, the customer leases the solar powered-systems as they would lease a car. In both cases, the system is owned by a third party while the host of the solar panel will receive the benefits of solar energy without the upfront cost of solar energy. These third-party financing modules are becoming one of the most popular methods for customers to realize the benefits of solar power. For example, Colorado first entered the third party solar power market back in 2010 and by mid-2011 third-party installation of solar panels represented over 60% of all residential installation of solar panels and the continued to 75% through the first half of 2012. This upward trend is very evident throughout the states that have introduced third-party financing models.

Power Purchase Agreement Considerations

SRECs

Solar renewable energy credits (SRECs) show that there’s a certain amount of electricity was produced using solar power. There are usually bought and sold by load-serving entities (usually regulated utilities) to meet obligations associated with state-level renewable energy standards. SRECs are also used by consumers who voluntarily purchase them for marketing claims or other use. Most often power purchase agreements, SRECs are owned by the solar company. When entering into a power purchase agreement, it will be important for a customer to clearly understand who owns and can sell the SRECs generated from the solar-powered systems, the risks attendant to SREC ownership, and the tradeoffs with respect to power purchase agreements prices.

Finance

While both third-party financing models provide numerous benefits, purchasing a solar-powered system should consider each of the financing options available to find the best fit.

Upgrades

While the solar company is responsible for the installation of solar panels, operations and maintenance of solar-powered systems, the solar panels host customer may need to make investments in their property in order to support the installation of solar panels, lower the cost of solar energy or to comply with local ordinances. This could include, rooftop repairs or trimming trees that shade the solar-powered systems.

Possible Higher Property Taxes

Though the installation of solar panels may help raise the site’s property value, there is also a potential increase in property taxes when the property values are reassessed. But different states will have different policies in regards to these possible property tax increases.  

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