Tag: solar power purchase agreements

by Lisa Dang

Although solar energy has recently become one of the cheapest forms of generating electricity, the upfront capital cost of solar installation remains high. Large companies like Google, Walmart, Apple, and Amazon have made major investments in solar energy, reaping the benefits of reducing energy costs, promoting a cleaner environment, and taking advantage of climate-friendly policies. Meanwhile, start-up companies and small businesses have shied away from solar installations, causing them to lose out on these benefits. Despite the decreasing prices of solar technology, commercial solar installation costs remain high for small and mid-sized businesses, ranging from $43,000 for a 25-kilowatt (kW) system up to $175,000 for a 100-kW system. However, financing options like Solar Power Purchase Agreements (PPA) provide a vehicle for businesses that lack the capital to invest in solar energy.

I. Solar Power Purchase Agreement Financing

A solar power purchase agreement (PPA) is a contractual financial agreement in which a third-party developer owns, operates, and maintains the solar system, and a host customer agrees to have the solar system on its property at little to no upfront costs. The developer sells the power generated on the host customer’s site at a fixed rate to the customer, which is typically lower than the local utility’s retail rate. The contract terms of Solar PPAs are generally long-term agreements of 10 to 25 years. At the end of the contract term, customers may have the option to extend the contract term, purchase the system from the developer, or have the system removed from the property. Solar PPAs may take on many different forms and can be negotiated and tailored to suit the needs of the business and developer.

1. The Pros and Cons of Solar PPAs

While owning a solar system outright provides business owners with certain federal tax credits and may provide more cost savings overall, the upfront costs present barriers for businesses that lack capital.

 

 

Advantages of solar PPAs include:

• • • Minimal to no upfront capital expense
    • Saving money on energy costs
    • Predictable, fixed cost of electricity
    • No operating and maintenance responsibilities
    • Negotiable contracts that fit the needs of the business
    • Environmental and social benefits

Disadvantages of Solar PPAs include:

• • • Likely ineligibility for incentives such as federal tax credits
    • Lower overall savings than purchasing a solar panel system outright
    • Long-term contracts that typically last for 10–25 years
    • Possible responsibility for early termination fees

Solar PPAs have several benefits, but it is not for everyone. The advantages and disadvantages of solar PPAs should be considered in light of each small business and start-up company’s particular circumstances.

2. Is a Solar PPA Right for Your Small Business?

While utilizing solar energy is the right move from an environmental and socioeconomic perspective, the upfront costs of investing in solar technology remain costly and the savings may not be recouped until four years after installation. Before entering a solar PPA, small business owners and start-up companies should consider many factors. One factor to consider is the price of electricity specified in the terms of the contract. Although solar PPAs provide predictable rates of electricity pricing, many solar PPAs contain a fixed escalator clause, typically raising the price the customer pays between 2-5% annually. While this rate is often lower than the projected utility price increases, customers risk overpaying for solar energy as retail electricity prices may decline or increase more slowly than the escalator plan. Further, negotiating favorable solar PPAs may be complex and potentially have a higher transaction cost than buying the solar system outright. Nevertheless, solar PPAs provide predictable, predetermined rates allowing businesses to budget accurately.

Another factor to consider is whether a long-term contract is feasible for small business owners. In cases where a business owner rents their property, a solar PPA may not be a viable option unless the leased property is a long-term lease that covers the period of the solar PPA term, or the landlord or owner of the property agrees to enter into the contract. Moreover, solar PPAs prevent the business owner from taking advantage of federal tax credits, which are available only to the owner of the solar system. However, in many cases, developers will factor in their solar tax credits and reduce the costs of the electricity delivered to customers.

II. Conclusion

Determining whether a solar PPA is the right choice for a small business will depend on several factors. If a business has the upfront capital to invest in its own solar system, it will likely save more on energy costs in the long term. However, the business will be responsible for the solar system’s repair and maintenance costs. In contrast, businesses that do not have the upfront capital to purchase their own solar system may benefit from a solar PPA. However, solar PPAs may be complex and include negotiation terms more favorable to the business owner, resulting in higher transaction costs. Undoubtedly, businesses of all sizes can benefit from solar energy, but a critical step to deploying solar technology requires weighing the pros and cons of how to fund solar installations.

This post has been reproduced and updated with the author’s permission. It was originally authored on March 21, 2023 and can be found here.

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Sources:

U.S. Dept. of Energy, Energy Efficiency & Renewable Energy, Power Purchase Agreements (Feb. 2011). https://www.energy.gov/eere/femp/articles/power-purchase-agreements.

Solar Energy Industries Association (SEIA), Solar Power Purchase Agreements, https://www.seia.org/research-resources/solar-power-purchase-agreements.

Inflation Reduction Act of 2022, Pub. L. No. 117-169 (2022).