One of the biggest hurdles to solar energy deployment is the upfront cost of the solar energy system. Power Purchase Agreements for solar 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. Solar PPAs are especially popular with commercial and industrial solar systems as they allow businesses to install solar systems without upfront investment while locking in stable energy costs.
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?
A power purchase agreement for solar energy involves a third party owning the solar PV system, and the organization enters into a long-term contract to purchase the solar electricity. The host typically provides the necessary space for the solar equipment, or the installation can occur off-site, with electricity delivered via the utility grid. With a power purchase agreement for solar, the system owner takes care of all maintenance and repairs.
The terms of a solar PPAÂ can vary significantly, with contracts lasting anywhere from six years to 25 years. Some agreements allow clients to purchase the solar system at fair market value after the initial term.
How Do Solar PPAs Work?
In a power purchase agreement for solar, the host organization agrees to purchase electricity generated by the solar system without owning the equipment itself. Typically, this allows them to buy electricity at a lower rate per kilowatt-hour compared to local utility rates, resulting in reduced operating costs. The solar system owner benefits from the income generated and can claim federal tax credits, meaning the organization purchasing the power does not qualify for these tax benefits.
Solar PPAs are particularly popular for commercial installations, especially as financing options for residential systems have become more prevalent. They are especially advantageous for organizations that cannot leverage tax credits due to their taxable status or tax appetite.
The specifics of the solar PPA, including payment terms, electricity delivery schedules, and termination clauses, vary by project. Power rates may often increase over time, but typically at a lower rate than historical increases in grid power, making PPAs financially appealing in the long run.
Who Receives The Incentives With a Solar Power Purchase Agreement?
In a power purchase agreement for solar, the solar panel system owner typically receives any applicable incentives, including the solar tax credits and Renewable Energy Certificates (RECs) associated with the solar installation. While not all states have policies governing RECs, they can be particularly valuable in states with active renewable energy markets, especially for large solar PV systems.
This arrangement means that organizations purchasing electricity under a solar PPA usually do not qualify for these incentives, which can influence their overall cost savings and return on investment. For further details on how incentives work with solar agreements, refer to resources from the Solar Energy Industries Association and other renewable energy organizations.
Solar Leases Vs. Solar PPAs
Both arrangements are similar in some ways because a third party owns the solar panels and equipment. With a solar lease, the organization leases the equipment, but with a solar PPA, the organization purchases the electricity generated by the solar system.
Therefore, in unseasonably cloudy weather, an organization in a PPA will pay less because less energy is generated. By contrast, an organization leasing 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 in the long term compared to owning solar panels. Let’s look at the pros and cons of solar PPAs.
Pros of Solar PPAs
No Upfront Costs: Host organizations do not need to purchase or finance solar equipment, allowing them to access solar energy with little to no initial investment.
Cost Savings: Solar power purchase agreements can help organizations achieve significant savings on electricity bills and shield themselves from future utility rate hikes.
Low Financial Risk: The solar provider has maintenance responsibilities for the solar PV system, reducing financial risk, particularly when working with reputable companies.
Property Tax Exemptions: Typically, the organization purchasing solar electricity under a solar PPAÂ is not liable for property taxes on the solar array.
Sustainability Benefits: Organizations enjoy the environmental benefits and positive publicity of solar energy, enhancing their corporate social responsibility initiatives.
Cons of Solar PPA Programs
Lower Long-Term Savings
Although a solar PPA can be attractive initially due to low or no upfront costs, it often results in lower overall savings compared to owning the system outright. If an organization has access to capital or low-interest financing, purchasing the solar array may be a more financially beneficial option. This is especially true when considering the potential for energy cost savings over the long term, which can exceed the savings from a PPA.
Ineligibility for Solar Tax Credits
Under a solar PPA program, the host organization purchasing the power cannot take advantage of valuable federal tax credits associated with the solar system. For larger PV systems, these tax credits can significantly impact overall project economics. Non-profits or organizations with minimal tax liabilities may not qualify for these incentives, which could further skew the financial analysis in favor of ownership.
Loss of Renewable Energy Certificates
Renewable Energy Certificates (RECs) generated by the solar system can hold considerable value in certain states. Since the system owner retains these certificates, the host organization misses out on potential revenue associated with the solar energy produced. This loss with solar PPAs can be particularly significant in states with aggressive renewable portfolio standards.
Limited Increase in Property Value
Because the host organization does not own the solar system, it may not see an increase in property value with a solar PPA. This could be a drawback for organizations considering the long-term financial benefits of property appreciation. In real estate markets where property value is tied to energy efficiency and sustainability features, this could be a missed opportunity.
Potential for Complex Agreements
Solar PPA programs can involve complex terms and conditions that may lead to misunderstandings or disputes over time. Organizations need to thoroughly review and understand the contract to avoid future complications. Important factors to scrutinize in solar PPA programs include performance guarantees, maintenance responsibilities, and escalator clauses that could increase energy costs over time.
Alternatives to Solar PPA Programs
There are various 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.
Solar Loans
Solar loans present another viable alternative to a solar PPA program. These loans enable businesses and homeowners to finance their solar installations through borrowing. They typically feature flexible repayment terms and competitive interest rates, allowing borrowers to spread out payments while benefiting from immediate energy savings.
Also, those who finance their systems through loans can often take advantage of tax credits and incentives, further enhancing the financial returns on their investment. This option can be particularly beneficial for those who prefer ownership over leasing, as it ultimately leads to greater savings in the long run.
Community Solar Farms
Community solar programs specifically designed for commercial entities allow businesses to invest in shared solar projects without needing to install panels on their own properties. These programs are particularly beneficial in states with robust community solar frameworks, such as California, Massachusetts, and New York, where legislation supports community solar.
In California, the Community Solar Green Tariff Program enables businesses to subscribe to local solar farms, receiving utility bill credits based on their subscription amount. Similarly, Massachusetts has made significant strides with its SMART Program, which incentivizes commercial solar developers to participate in community solar projects, allowing businesses to access renewable energy without the upfront costs of installation.
In New York, the Community Solar Initiative encourages commercial participation, offering financial incentives and facilitating subscriptions to off-site solar installations. This model allows businesses to benefit from renewable energy while contributing to local sustainability efforts without participating in a solar PPA program.
Wind Power Purchase Agreements
Like solar PPA programs, wind PPAs allow organizations to procure renewable energy from wind farms at a fixed rate, offering predictability in energy costs. This option can diversify an organization’s renewable energy portfolio and mitigate risks associated with fluctuating electricity prices. By locking in a fixed rate, organizations can also contribute to sustainability goals while supporting the development of clean energy infrastructure​
Solar Incentives & Solar PPA Programs
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 was available for systems installed in 2021 and 2022 before the Inflation Reduction Act was passed.
The solar tax credit 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. However, the owner of the solar power system is eligible for the solar incentives.
FAQs About Power Purchase Agreement For Solar
Let's examine many common questions related to PPAs and renewable energy.
Will a solar PPA increase my property taxes?
Owning a solar system may elevate your home or business' value, potentially resulting in increased property taxes. Conversely, when a solar provider owns the system through a PPA, the responsibility for property tax implications typically rests with the provider. Therefore, solar PPAs rarely increase property taxes.
How long do solar PPA programs last?
Solar Power Purchase Agreements typically span 10 to 25 years. During this period, the customer buying the electricity enjoys the benefits of solar energy without the financial burden of owning and maintaining the solar system. The extended contract period ensures a stable and predictable energy cost for the customer while allowing the solar provider to recoup their investment over time.
Are there upfront costs for signing a power purchase agreement for solar?
Solar PPAs generally involve minimal or no upfront costs for customers. This accessibility makes solar energy adoption more feasible by removing the initial financial barrier. The solar provider covers the installation expenses, and the customer pays for the generated electricity at an agreed-upon rate, providing a cost-effective and sustainable solution for households and businesses interested in using renewable energy.
What companies have signed solar PPAs?
Many companies have embraced Power Purchase Agreements to benefit from solar energy without the upfront costs. Notable participants include tech giants like Google, Apple, and Microsoft, as well as retailers such as Walmart and Target. Solar PPAs enable businesses to reduce their carbon footprint, achieve sustainability goals, and access cost-effective renewable energy without the financial burden of owning and maintaining solar systems.
How can I enter a solar PPA program?
To secure a solar PPA, research local solar companies offering PPA options. Engage with reputable companies, compare contract terms, and assess the proposed electricity rate. Consult legal and financial advisors to ensure understanding and fairness in the agreement. Once satisfied, sign the solar PPA, which will enable you to access solar energy without upfront costs while supporting sustainability and potentially reducing long-term energy expenses.
Can I buy out a solar PPA?
Yes, in many cases, it's possible to negotiate with the provider to buy out a Power Purchase Agreement for solar. The terms and conditions for buyouts vary, and some PPAs may have specific clauses outlining the process, including the buyout price. Consult the PPA contract and communicate with the provider to explore options and understand any associated costs or conditions.
Solar PPA Programs Are A Good Option For Many Organizations
As the solar energy industry matures, more funding options and mechanisms are in place to displace the upfront cost of purchasing a solar system. A PPA is the logical choice for many clients, but not always. Therefore, understanding the ownership models for solar systems is critical so you can better inform your clients.
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