POWER PURCHASE AGREEMENTS
A Solar Power Purchase Agreement (PPA) is a financial arrangement where a solar company arranges for the design, permitting, financing and installation of a solar energy system on a customer’s property at little to no cost. The company sells the Net Metering credits or the power generated to the host customer at a fixed rate that is typically lower than the local utility’s retail rate (in Vermont, only utilities can sell electricity to consumers).
This lower electricity price serves to offset the customer’s purchase of electricity from the grid while the solar company receives the income from the sales of Net Metering credits or electricity as well as any tax credits and other incentives generated from the system. PPAs typically range from 10 to 25 years and the developer remains responsible for the operation and maintenance of the system for the duration of the agreement. At the end of the PPA contract term, a customer may be able to extend the PPA, have the project owner remove the system or choose to buy the solar energy system from the owner.
No or low upfront capital costs: The developer handles the upfront costs of sizing, procuring and installing the solar Photovoltaic (PV) system. Without any upfront investment, the host customer is able to adopt solar and begin saving money as soon as the system becomes operational.
Reduced energy costs: Solar PPAs provide a fixed, predictable cost of electricity for the duration of the agreement and are structured in one of two ways. Under the fixed escalator plan, the price the customer pays increases at a predetermined rate, typically between 2% – 5%. This is usually lower than projected utility price increases. The fixed price plan, on the other hand, maintains a constant price throughout the term of the PPA, saving the customer more as utility prices rise over time.
Limited risk: The developer is responsible for system performance and operating risk.
Better leverage of available tax credits: Developers are typically better positioned to utilize available tax credits to reduce system costs. For example, municipal hosts and other public entities with no taxable income would not otherwise be able to take advantage of the Section 48 Investment Tax Credit.
Potential increase in property value: A solar PV system has been shown to increase residential property values. The long-term nature of these agreements allows PPAs to be transferred with the property and thus provides customers a means to invest in their home at little or no cost.
SRECs: Solar Renewable Energy Credits (SRECs) show that a certain amount of electricity was produced using solar energy. They are typically bought and sold by load serving entities (typically 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 in PPAs , SRECs are owned by the project owner. When entering into a PPA, it will be important for a customer to clearly understand who owns and can sell the SRECs generated from the PV system, the risks attendant to SREC ownership, and the tradeoffs with respect to PPA price.
How to finance: While both third-party financing models provide numerous benefits, purchasing a PV system outright has its own benefits. Anyone considering installing a solar PV system should consider each of the financing options available to find the best fit.
Site upgrades: While the developer is responsible for installation, operation and maintenance of a solar PV system, the host customer may need to make investments in their property in order to support the installation of the system, lower the cost of installation or to comply with local ordinances. This might include, for example, rooftop repairs or trimming trees that shade the PV system.
Possible higher property taxes: While a PV system may help to increase the site’s property value, there is also a potential increase in property taxes when the property value is reassessed. Differing states, however, have different policies regarding possible property tax increases.