Many organizations today are focused on reducing electricity costs and meeting sustainability goals by adding renewable energy into their overall energy strategy.
Embarking on a solar project can provide both environmental and financial benefits. Solar energy can help organizations offset their carbon footprint while lowering their electricity bills, diversifying energy supply, and hedging against future energy market volatility. The sustainability benefits of solar can also contribute to an organization’s environmental, social and corporate governance (ESG) strategy.
If you are in the process of weighing the pros and cons of solar energy for your business, it’s important to understand how a solar Power Purchase Agreement (PPA) works. A solar PPA is a popular option for businesses who wish to purchase and install solar panels on site can opt to enter a solar PPA. A solar PPA is a financial agreement in which a developer arranges for the design, permitting, financing, and installation of a solar energy system on a customer’s property with no upfront capital costs to the customer. With a PPA, an organization typically enters into a 15 to 20-year agreement with the solar developer. The customer is not responsible for the installation or maintenance of the solar system, the solar developer is responsible. The developer then sells the electricity generated by the solar facility back to you, the customer, at a rate that is less than the prevailing cost of energy.
Top 10 considerations before signing a solar PPA
A solar PPA might be the ideal option for integrating solar energy into your organization’s overall energy strategy. Before you sign on the dotted line, however, you’ll want to ensure that these critical questions are answered and clarified in your PPA agreement.
1. Is a Solar PPA a good value?
This is the obvious first question, but the answer is not a simple one. Solar PPAs can provide electricity at a lower cost than electricity rates from a utility as well as future price certainty for the duration of the PPA. But there are many ways to structure solar PPAs and great care should be taken to ensure that the savings, risks, and benefits have been thoroughly evaluated. What will you pay per kilowatt-hour (kWh)? Is it lower than electricity from the grid and, if so, for how long? What is the pricing structure over time and how much can you save over the duration of your contract? Is there an “escalator” (a contractual provision that increases or decreases the contract price according to changing market conditions)? How much of your electricity usage will be offset by solar and how much will you still need to purchase from or sell back into the grid and at what price? You’ll want to consider these important elements, understand the financial implications, and make sure the details are clearly spelled out in your solar PPA.
2. What are the contractual terms?
Besides price, energy production, and duration, there are several other terms that should be discussed and agreed upon before you sign a solar PPA. For example: What happens when the PPA contract ends? Who is responsible for removing the system at the end of the contract? What happens if the developer goes out of business or if the business changes hands? What happens to your PPA if your organization moves to a new location? Can your PPA be sold or change hands without your knowledge or approval? Be sure to ask pertinent questions and that the agreed-upon terms are clearly detailed in the contract.
3. What kind of risk is involved with a solar PPA?
As with any type of long-term contract, a PPA can come with risk. You’ll want to be sure that risk is evenly distributed between your organization (the customer) and the developer (the owner). Your organization can be prone to utility energy cost escalation and tariff restructuring, or annual price escalation of the PPA. You should also understand what happens if your electricity requirements increase over time or if the forecasted energy production is different from the actual production. What happens if the system performance degrades over time? What if the developer goes out of business or the business changes hands? It’s important to understand the risks involved and ensure that all details are included in the solar PPA.
4. Who is underwriting the PPA or providing the capital?
This is a big one. Just because a developer shows you a PPA, does not mean it is financed. A solar PPA is a financial agreement between you and the developer. The developer owns the photovoltaic (PV) system and needs to facilitate the financing of the distributed generation assets such as photovoltaic panels, microturbines, reciprocating engines, and fuel cells. Some developers might first seek out clients, then pursue financing. Don’t sign a PPA without understanding that the capital is secured and where the capital is coming from.
5. Where is the tax equity coming from?
This one is similar to #4 and also critical. Developers who invest in solar systems can benefit from federal tax incentives that reduce the amount of taxes their business would otherwise have to pay. To take advantage of these incentives, however, the developer’s business must have enough tax liability. If a developer does not have sufficient tax liability, they may choose to partner with a tax equity investor. The two entities can use the tax benefits as partners. Tax equity arrangements can be complex. That’s why it’s important to make sure all these elements are securely in place before signing on with a solar developer.
6. What happens if the system breaks?
Solar systems, once installed, are relatively low maintenance and the developer is responsible for maintenance and repair for the duration of the PPA. In fact, the developer is financially incentivized to keep the system in good working order. However, if the system breaks, you may need to use energy directly from the grid, likely at a higher price. Be sure that your contract clearly details the process and timeline for repairs.
7. Is there a solar performance or production guarantee?
A solar PPA should include a performance guarantee (e.g. 90-99% of estimated production). You’ll want to make sure that you aren’t billed for more than the system actually produces. The contract should have language outlining the guarantee such as: “The owner guarantees that during the term of the PPA the system will generate the guaranteed kilowatt-hours (Guaranteed kWh) of energy under usual weather conditions.” Additionally, there should be language addressing what happens if the system underperforms such as: “The owner will send the customer a refund check equal to the difference between the Guaranteed kWh and the cumulative Actual kWh.”
8. What happens at the end of a PPA term?
At the end of your solar PPA contract, there are typically three options:
- The system will be taken away at no cost to you.
- You can renegotiate and renew your contract.
- You can buy the system outright from the developer.
Your solar contract should outline end-of-term buyout provisions which typically state that you can buy the system at the greater of a specified buyout value or fair market value as determined by an independent third-party appraiser. While the end of the term may seem like a long way away, you want to make sure the buyout provisions are specified, fair, and reflect the true value of the system. No matter which end-of-term option you choose, you’ll want to be sure that the termination structures are fair and clearly outlined.
9. Can I trust this solar developer?
You may be fielding multiple emails and phone calls from solar developers offering you “the best deal.” While there’s no shortage of developers and “deals”, it pays to compare your options before jumping into a solar PPA. When choosing a solar developer, in addition to price and duration, you should also consider the quality of the solar equipment, the reputation of the developer, and how comfortable you are with the installer. A PPA contract is typically 15-20 years. That’s a long time to work with a business that you can’t rely on or don’t trust. You may benefit from interviewing several solar developers and requesting proposals from each so you can conduct a thorough comparison.
10. Should I utilize a solar energy consultant?
As you can see, choosing a solar developer can be a nuanced and complex process with myriad PPA contract structures to consider. If you aren’t well-versed in procuring solar energy or determining which solar developer may be right for you, an energy consultant might be your best option. Rather than seeking out multiple developers, garnering reviews and testimonials, and comparing numerous proposals, you can work with one energy consultant who will “sit on your side of the table” and advocate for you. Typically, an experienced solar developer “speaks the language” and will get to the “right” answer quickly and efficiently. Money is rarely left on the table when you utilize an experienced advisor.
The Usource team consists of experienced renewable energy advisors, energy analysts, and energy procurement specialists. When you work with us, you’ll leverage the deep industry knowledge and experience of our entire team. Usource is part of the NextEra Energy family of companies. NextEra Energy, Inc. is the world’s largest producer of wind and solar energy. As part of NextEra Energy, Usource is uniquely positioned to analyze, facilitate and execute your solar energy project to ensure that your PPA and your solar solution are a cohesive fit with your organization’s overall energy strategy.