What Is A Solar Energy Purchase Power Agreement (SPPA)?
Updated: Oct 17, 2022
One of the biggest hurdles to solar energy deployment is the upfront cost of the solar energy system. Power purchase Agreements (PPAs) were created to help eliminate this obstacle, resulting in significant growth in the industry. This arrangement enables projects to be cash-flow positive for your clients from day one. They are especially popular with commercial solar systems for nonprofits, governmental organizations and corporations.
Despite being widespread in the solar power industry, many myths and misconceptions exist about solar PPAs. Let’s demystify the topic so you can better serve and educate your clients.
What Is A Solar PPA?
In a PPA, a third party owns the solar PV system, and the organization enters a long-term contract to purchase the solar electricity and host the solar system on the property. The host often provides space for the solar equipment, or else the installation is installed off-site, and the electricity is delivered via the grid. The owner of the solar system is responsible for all maintenance and repairs on the system.
With this arrangement, the host agrees to purchase the electricity from the system but not the solar equipment. In most cases, they can buy electricity at a lower rate per kilowatt-hour than the local utility company rates, resulting in lower operating costs. The solar system owner benefits from the income generated from the solar system and the federal tax credit. Thus, the organization buying the power is not eligible for the tax credit, write-offs, and other incentives.
Solar PPAs are especially popular for commercial installations, especially now that solar financing for residential systems has become more widespread. It is most attractive when the organization buying the power cannot take advantage of tax credits due to their taxable status or tax appetite.
Unless otherwise stated, the solar panel system owner gets any applicable incentives and the Renewable Energy Certificates (RECs) associated with the solar installation. Although not all states have this initiative, the RECs generated by a system are valuable in some states, especially for large solar PV systems.
The structure of the PPA contract can vary by the installation. For example, some last only six years and then allow the client to purchase the solar system for fair market value. Others are 25-year contracts.
Likewise, the payment terms, schedule for delivering electricity, and termination vary by the project. Often, the power rate increases over time but at a lower rate than historical increases in grid power. Thus, entering such an agreement enables the host organization to reduce the risk associated with unknown energy costs.
How Are Solar Leases and PPAs Different?
With a solar lease, the organization is leasing the equipment. In a solar PPA, the organization is purchasing the electricity generated by the solar system.
Therefore, in unseasonably cloudy weather, an organization in a PPA will pay less because less energy was generated. By contrast, an organization leasing the solar panels would pay the same amount regardless of the amount of power produced.
Pros And Cons Of Solar Purchase Power Agreements
Typically, PPAs are better for the host organization in the short term but are often not as beneficial long term compared to owning the solar panels. Let’s look at the pros and cons of PPAs.
One of the most significant advantages to PPAs is that the host organization doesn’t need to purchase the equipment and finance the solar PV installation. Yet, they can have some of the advantages of solar energy without the upfront capital costs. Organizations can enjoy cost savings on electricity bills and even mitigate the impacts of future utility rate hikes. Also, they aren’t responsible for solar PV system maintenance, so the financial risk involved is quite low, especially when working with reputable companies. The host organization can enjoy the sustainability benefits and positive publicity associated with utilizing solar electricity.
Although solar PPAs are very attractive in the short term, they are often less appealing long term. This is because PPAs result in lower long-term savings compared to owning the system. If capital or low-interest financing is available and the organization can take advantage of the tax incentives, purchasing the solar system might be more lucrative.
The host organization purchasing the power cannot take advantage of the federal tax credit associated with the solar system. If it is a large solar system, this tax credit can be quite valuable. However, many organizations don’t qualify for tax credits, including non-profit organizations or companies with a small tax appetite.
The RECs generated from the solar system can have substantial value in some states, and the owner gets those. Also, because the host organization doesn’t own the solar system, it doesn’t increase the property value as much, if at all.
Alternative Options For Financing PV Solar Arrays
There are a variety of ways to finance a solar system other than using a PPA, for both residential and commercial applications.
Renting Solar Panels
This program is only available to solar shoppers in Arizona, California, Connecticut, Massachusetts, New Jersey and New Mexico. They have three different options to choose from: a 3.8 kW, 7.2 kW, and an 11.4 kW solar system for $50, $100 and $150 a month, respectively. Although the program had a cancelation fee at first, it has since been eliminated, meaning that the program has no long-term commitment.
Numerous solar installers offer solar loans to their customers. Often, these loans are specifically designed for installing renewable energy projects for either residential or commercial applications. The rates and structure of the program vary by the lender. Often, the interest rate is relatively low and fixed, but the fee for the loan is high and paid by the installer. In addition, the individual or business must meet credit score requirements.
Another option for residential systems is a home equity line of credit, and the home itself is used as collateral for the loan. Typically, the interest rate is fixed for a set term. As stipulated by the IRS, if the loan is used “to buy, build, or substantially improve the taxpayer’s home that secures the loan,” then the interest is tax-deductible. The homeowner must meet the minimum credit score requirements and have ample income or savings to repay the loan.
An option for businesses is to take out a business loan. Typically, these have a fixed interest rate on a set schedule. Many will use an asset as collateral, such as real estate or equipment. Lenders look at the credit score of the business and owner, time in business, and the company financials when approving such loans.
Community Solar Farms
Certain states, including Massachusetts, New York, Minnesota and Colorado, have laws supporting community solar development. In such states, joining a community solar farm is an appealing option for some residential and commercial solar shoppers.
There are a couple of different models for community solar: one involves buying in, and the other is a subscription model. The former can require an upfront investment, while the latter is a short-term commitment with monthly payments.
Tax Credits And Incentives
The investment tax credit, write-offs, and local incentives can significantly reduce the net cost of installing a solar energy system or help finance the photovoltaic array. For example, a 26 percent federal tax credit is available for systems installed in 2021 and 2022 prior to the passing of the Inflation Reduction Act. It has increased to 30 percent through 2032. In addition, many businesses can take advantage of tax write-offs or bonus depreciation. Also, property-assessed clean energy (PACE) financing is an option in many areas across the United States, and renewable energy installations often qualify.
As the solar energy industry matures, more funding options and mechanisms are in place to displace the upfront cost of purchasing a solar system. For many clients, a PPA is the logical choice, but not always. Therefore, understanding the ownership models for solar systems is critical so you can better inform your clients.
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