Solar Power Purchase Agreements Defined

A solar Power Purchase Agreement (“PPA”) is a contract between an electrical consumer, or host, and the owner of a solar electric facility for the purchase and sale of the facility’s electrical output. The electrical facility is located on the host’s property and its output is sold to the host at a specified price over the length of the contract (generally 15 – 20 years). The electricity initially is priced 5% - 10% lower then the host’s average cost of grid-sourced electricity.

The solar facilities behind PPAs are most often financed by a third party so the buyer has no capital outlay, or required investment. And that means the buyer can focus their cash on core business needs. PPAs match the investment appetite of investors who can use available tax credits and other economic benefits of the project with large electricity users who are concerned about rising utility rates and want to find an economically attractive way to hedge a portion of their current and future electricity costs.

PPAs are increasingly popular mechanisms allowing companies and organizations to make their operations more sustainable and be a part of the climate change solution set. They are proving to be a major engine of growth for the solar power industry. 

Benefits of SPPAs

The upfront cost of a solar or wind system deters many companies from choosing these clean sources of energy. In addition, many companies want to conserve their cash investments for their core businesses, and not to diversify into energy generation. For these commercial customers, the SPPA approach is ideal. It allows commercial entities to “go green” with other people’s money, capture the benefits of being a green organization, and save money on their electricity costs.

Unlike power generated from fossil fuels and nuclear energy where the price is bound to rise and keep rising, the “current and future cost” from solar power facilities is driven by fixed pricing terms, thus eliminating the pricing uncertainty of future electricity rates. What’s more sunshine is clean, emits no carbon or other harmful emissions and can earn the customer major PR benefits and employee goodwill. 

Who’s Using SPPAs?

Many large businesses such as Kohl’s and Wal-Mart department stores, and a variety of institutions such as the Denver International Airport and numerous water management operations use SPPAs for buying solar electricity. Public and private schools, colleges and universities, sports arenas, commercial operations that are in high-cost utility markets, want to hedge future costs, and want the marketing and employee benefits of being green.

The third parties providing the financing for these projects see them as excellent investments because the contracts ensure payment and the product being supplied is essential to the customer’s operations. Legally, the third party is the owner of the solar electric system and receives the benefit of the federal and state tax incentives, some of which can significantly reduce their taxable income.

In most SPPA transactions, the commercial host has an option to purchase the facility at various times during the length of the contract, the first opportunity being in the 6th year at the earliest. Major commercial banks such as Goldman Sachs, Morgan Stanley and J P. Morgan Chase are among the financial institutions that provide financing by connecting the host with the financial assets of their wealthy clientele.

Standard Solar and other SPPA Participants

Standard Solar performs several integral roles and thereby simplifies the system design and SPPA contracting, as well as, the installation, operation, monitoring and maintenance of the equipment.  In other words, it is the company you hire and rely on for turnkey solar installation, integration and finance.

Standard Solar maintains relationships with proven and cutting-edge suppliers of solar equipment, financial institutions and any needed contractors, ensuring the optimal match for your project. And our seasoned industry professionals have a track record of success keeping solar projects on track and are experts at avoiding unnecessary headaches and startup delays. If there is question or a problem at any step in the process, Standard Solar is your ally at every turn. Having one company to turn to keeps the transaction costs to a minimum and rewards you with a competitive price for electricity for the term of the SPPA.

The Step-by-Step Process

1. Standard Solar begins by assessing how much electricity can be produced from the space available on your rooftop or adjacent land.

2. Based on the amount of electricity needed and the available area, Standard Solar scales the proposed solar electric facility to offset the most costly grid electricity and delivers a preliminary term sheet for the client to review.

3. Once the client and Standard Solar reach an accord the SPPA document is drafted to incorporate the agreed upon terms and final SPPA negotiations begin.

4. Standard Solar begins its detailed project development plan and introduces the investment opportunity to its banking partners to begin the underwriting process.

5. With a signed and financially underwritten contract and the roles for Standard Solar defined, certified company technicians build the system and prepare it to begin generating electricity.

6. Before you can begin taking electricity from modules, Standard Solar will make specific arrangements with your electric utility. They include but are not limited to:

1. Terms of “interconnecting” with your regulated electricity distributor, or utility.
2. How any excess electricity generated by your facility under “net metering” provisions in your state earns you a credit towards future power needed from the utility. 
3. How the electricity can avoid peak demand charges.

7. You flip the ‘switch,’ with as much fanfare as is appropriate for your company, your community and important stakeholders.

8. Standard Solar, remotely monitors the system ensuring optimal performance. Any maintenance issue is the Standard Solar’s responsibility.

9. You go on running and growing your business!

Additional Information:

“A Customer’s Guide to Solar Power Purchase Agreements,” October 2008, Rahus Institute, www.californiasolarcenter.org/sppa.html;

“Guide to Purchasing Green Power,” Green Power Partnership, September 2004, www1.eere.energy.gov/femp/pdfs/purchase_green_power.pdf;

“Solar Power Services: How PPAs Are Changing the PV Value Chain,” executive summary, GreenTech Media, February 2008, www.greentechmedia.com/reports/research-report-solar-power-services.html;

“Solar Photovoltaic Financing: Deployment on Public Property by State and Local Governments,: National Renewable Energy Laboratory, May 2008, www.nrel.gov/docs/fy08osti/43115.pdf