There is a new financial model for solar energy—and it is actually a variation on an old model, called a Power Purchase Agreement.
Spurred by Growth
Solar energy technologies have seen a 48 percent installation growth in overall generating capacity in the U.S. since 2000, while solar growth has been even more rapid in other countries, such as Germany. Much of that growth has been in grid-tied photovoltaic (PV) solar systems, which produce electricity from sunlight and which reduce, but do not replace, the power drawn from the electrical grid.
With interest in alternative energy rising rapidly, this new financial model has emerged for those who want to use solar electricity without paying the up-front cost of installing a solar energy system.
A New Flavor of an Old Thing
This new model is called a PPA, or Power Purchase Agreement. Strictly speaking, PPAs are not new; this kind of agreement has long been used by electric utilities providing power to large commercial customers. The new aspect of the PPA concept is the solar technology.
Under the terms of a solar PPA, a solar services provider installs solar equipment at a host business, government site, university, or other organization, and the host agrees to buy the solar electricity generated by the system for a fixed price and term, usually 5-20 years.
This arrangement provides value to both the power-consuming host and the PPA provider.
The host gets to lock in a price for the power derived from the system, thus making their energy budgeting and forecasting easier, and providing a hedge against rising energy prices.
The host does not have to attend to the system, monitor or service it—the PPA provider does that.
The host can demonstrate their commitment to using green power by having the solar energy system on their premises and using its electricity.
At the end of the term the host can buy the solar equipment at fair market value, or extend the PPA agreement, or ask the provider to remove the equipment.
PPA Provider Value—
The PPA can have confidence that the fuel for the generation system–sunlight—will not fluctuate in price or supply over time.
The PPA provider gets the income from selling the generated power to the host.
The PPA also gets the energy certificates (sometimes called “credits”) which can be traded in emerging green-energy credit markets.
The PPA can sell the solar technology to the host at fair market value after extracting the tax and energy-credit value from the system.
The PPA Sweet Spot
Customers considering hosting a PPA will generally find it can be to their advantage if they meet these criteria:
They use large amounts of electricity (from 200,000 kWh to 2MWh per year)
They own, or have long-term control over, the property on which the solar energy system will be sited
The property has a minimum of 10,000 square feet of unshaded space, either on rooftops or on the ground, for a 200,000 kWh system—or up to 12 acres for a 2MWh system
The property is in a state with supportive solar policies and incentives
The host has a good credit standing
PPA providers are companies with a twin set of knowledge and skill. First and foremost, they are financiers with strong connections to investors—including private investor groups and large Wall Street institutions. These tax equity investors provide equity financing and receive federal and state tax benefits in return. Second, PPA providers have solid understanding of solar energy system design and output, and close relationships with companies that install, monitor, manage and maintain solar energy systems—like Third Sun Solar.
PPA providers scale their offerings to provide a reasonable, pre-set electricity rate to the hosts, while also offering a steady rate of return to their investors. Implicit in all this is the fact that the PPA has every incentive to construct the most efficient, most productive solar energy system possible, in places with the maximum incentives for alternative energy. While there are many companies at the leading edge of solar research and development, PPA providers are not among them; they tend to go for the most conservative, proven systems possible to guarantee the best return for themselves and their investors.
The Role of Utilities
Large power utilities and distributors are now under mandate in many states to generate increasing portions of their total electric output through cleaner energy means. In states that support net-metering, investor-owned utilities are required to buy excess electricity produced by alternative energy systems, and in effect let consumers “spin the meter backwards” by putting energy back onto the grid.
Other PPA Supports
Other concurrent developments have changed the financial equation for solar energy. One is the emerging market in Solar Renewable Energy Certificates, or SRECs. Please see the Third Sun Solar white paper on this subject.
Another factor is a combination of state and federal incentives, including grant programs, a federal investment tax credit, and federal grants in lieu of the tax credit. These programs will tend to shift over time with the political winds, but have now gained enough momentum that power consumers—whether private or public, small or large, personal or corporate—expect to have incentivized options for choosing to go green and shift their energy usage to cleaner, safer, more secure and reliable sources—like solar.