Power Purchase Agreement (PPA)
Finance Services | Power Purchase Agreement (PPA)
Off Balance Sheet (buy the energy produced)
A twenty-year Power Purchase Agreement (PPA) is a financing arrangement that allows businesses or government agencies to purchase solar electricity with no upfront capital cost. To achieve this, a “host” organization provides unused rooftop, land, or parking lot space as the location for a solar installation. A third party PPA provider pays for the cost of the solar installation and assumes all responsibility for ownership, operation, and maintenance after the solar project is complete. As the host organization, you enter into an agreement to purchase the solar electricity produced by the system owned by the PPA provider at a predetermined rate per kilowatt-hour, the same unit of measurement on your standard utility bill.
- There are absolutely no upfront costs to the Host Customer or Building Owner
- A third party company with the cash flow and tax appetite will own and operate the system through a Power Purchase Agreement (PPA)
- The PPA Company will lease your roof through a type of solar easement and sell green power generated from the solar panels back to you at a discount from your utility company rates
- After a predetermined time, the system can be purchased at Fair Market Value
- While you are saving money on your electricity, you can take advantage of all of the marketing benefits of going solar
A well-structured PPA allows you to reduce electricity costs immediately and realize increased savings over time as grid electricity prices rise. Once the PPA contract period expires (typically after 20 years), you can purchase the system at a reduced price, initiate another PPA, or have the solar installation removed.
PPA Benefits
- No Upfront Capital Investment
No initial capital requirement, since you only pay for the solar electricity that is produced. GPS eliminates - Fixed Predictable Energy Rates/Prices
A PPA provides a powerful hedge against volatile electricity markets offering long-term certainty. - Full-Service Project Management & Maintenance
GPS designs, develops, and operates your solar energy system from start-to-finish. You have no responsibility for owning, operating or maintaining the solar system equipment. - Monetize Tax Credits & Solar Incentives
Benefit from solar tax credits, even if your organization has no tax liability to offset. The PPA financier is able to monetize available tax incentives and pass these savings on to you in the form of a lower PPA rate. - Positive Cash Flows
Operating costs are reduced from Day One. Facilitate benefit from improved planning and budgeting. - Well-defined Exit Options
Clients have the choice of purchasing the system or having it removed free of charge by SPG Solar.
As one of the pioneers of Power Purchase Agreement, our market-tested process is designed to be streamlined and easy to implement. GPS partners with top tier PPA financiers such as Wells Fargo, GE Energy and Morgan Stanley, and we will work with you to design the best solar PPA to meet your organization’s energy needs.
A Power Purchase Agreement (PPA), is a long-term agreement between the investor (PPA Provider) and a customer to provide solar electricity at guaranteed long-term rates. Green Power Systems provides the design, financing, maintenance and support for all elements of the solar electric system, including management of rebates and other government financial incentives. The customer buys only the generated electricity.
Added Value of a PPA
- No expensive installation costs
- Reduced monthly cost of electricity
- Long-term fixed energy expenses – excellent hedge against utility rate volatility
- No cost for ongoing operation and maintenance
- Generates electricity free of pollutants
- Enhanced public image
Included in a PPA
- Design: Each solar installation is designed and optimized for your facility and operations needs.
- Construction: GPS engineers the system and buys and installs all system components eliminating any need for you to make capital investments or manage multiple contractors.
- Ownership and Maintenance: GPS provides all necessary maintenance, upgrades and repairs so you can concentrate on your business—not on becoming a solar energy expert.
- Incentive and Tax Credit Management: GPS completes and tracks all filings for tax credits and other ancillary government incentives.
- Metering and Billing: GPS meters solar electrical output for individual systems and bills monthly for the energy produced.
- REC Dispatch: GPS will manage the distribution of Renewable Energy Credits as agreed upon in individual PPA’s.
What Is a Solar Power Purchase Agreement (SPPA)?
A Solar Power Purchase Agreement (SPPA) is a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its roof or elsewhere on its property and purchases the system’s electric output from the solar services provider for a predetermined period. This financial arrangement allows the host customer to receive stable, and sometimes lower cost electricity, while the solar services provider or another party acquires valuable financial benefits such as tax credits and income generated from the sale of electricity to the host customer.
With this business model, the host customer buys the services produced by the PV system rather than the PV system itself. This framework is referred to as the “solar services” model, and the developers who offer SPPAs are known as solar services providers. SPPA arrangements enable the host customer to avoid many of the traditional barriers to adoption for organizations looking to install solar systems: high up-front capital costs; system performance risk; and complex design and permitting processes. In addition, SPPA arrangements can be cash flow positive for the host customer from the day the system is commissioned.
How do SPPAs Work?
A host customer agrees to have solar panels installed on its property, typically its roof, and signs a long-term contract with the solar services provider to purchase the generated power. The host property can be either owned or leased (note that for leased properties, solar financing works best for customers that have a long-term lease). The purchase price of the generated electricity is typically at or slightly below the retail electric rate the host customer would pay its utility service provider. SPPA rates can be fixed, but they often contain an annual price escalator in the range of one to five percent to account for system efficiency decreases as the system ages and inflation-related costs increases for system operation, monitoring, maintenance, and anticipated increases in the price of grid-delivered electricity. An SPPA is a performance-based arrangement in which the host customer pays only for what the system produces. The term length of most SPPAs can range from six years (i.e., the time by which available tax benefits are fully realized) to as long as 25 years.
The solar services provider functions as the project coordinator, arranging the financing, design, permitting, and construction of the system. The solar services provider purchases the solar panels for the project from a PV manufacturer, who provides warranties for system equipment.
The installer will design the system, specify the appropriate system components, and may perform the follow-up maintenance over the life of the PV system. To install the system, the solar services provider might use an in-house team of installers or have a contractual relationship with an independent installer. Once the SPPA contract is signed, a typical installation can usually be completed in three to six months.
An investor provides equity financing and receives the federal and state tax benefits for which the system is eligible. Under certain circumstances, the investor and the solar services provider may together form a special purpose entity for the project to function as the legal entity that receives and distributes to the investor payments from the sale of the systems kWh output and tax benefits.
The utility serving the host customer provides an interconnection from the PV system to the grid, and continues its electric service with the host customer to cover the periods during which the system is producing less than the site’s electric demand. Certain states have net metering requirements in place that provide a method of crediting customers who produce electricity on-site for generation in excess of their own electricity consumption. In most states, the utility will credit excess electricity produced from the PV system, although the compensation varies significantly depending on state polices.
Benefits & Challenges of SPPAs
| Benefits for host customer | Challenges for host customer |
|---|---|
| · No upfront capital cost. · Predictable energy pricing. · No system performance or operating risk. · Projects can be cash flow positive from day one. · Visibly demonstrable environmental commitment. · Potential to make claims about being solar powered (if associated RECs are retained). · Potential reduction in carbon footprint (if associated RECs are retained). · Potential increase in property value. · Support for local economy and job creation. | · More complex negotiations and potentially higher transaction costs than buying PV system outright. · Administrative cost of paying two separate electricity bills if system does not meet 100 percent of site’s electric load. · Potential increase in property taxes if property value is reassessed. · Site lease may limit ability to make changes to property that would affect PV system performance or access to the system. · Understand trade offs related to REC ownership/sale. |