Financing Your Electricity with a Power Purchase Agreement [PPA]
As energy prices keep rising, more homeowners and businesses want to invest in renewable assets. Producing cheaper power, after all, means lower living and production costs, while renewable energy certificates, or RECs, represent additional income streams that many do not want to miss out on. However, as renewable energy projects come with a high initial investment, a special type of renewable energy project came into being: the power purchase agreement, in which you do not depend on power plants but also did not have to worry about installation and maintenance costs of your green energy system.
What is a Power Purchase Agreement? (PPA)
A Power Purchase Agreement (PPA) is the best solution for energy-intensive industries, commercial venues, and residences that do not want to pay high electricity costs. Power purchase agreements mean that a third party installs a power plant of a predetermined sort on the customer’s property and lets them enjoy cheaper power. Power purchase agreements help reduce the energy cost and enjoy the benefits of renewable energy and even heat.
A power purchase agreement is perfect for all who would like to reduce their energy costs while at the same time avoiding the installation cost and hassle that renewable projects usually require. After the third-party finishes installing, they will also enable physical delivery of electric power to your home, commercial offices, or even factory – all with the help of your utility company. This way, you can enjoy the benefits of significantly reduced energy costs, as well as heat costs in some PPA systems.
How Does it Work?
Before you start considering a PPA – power purchase agreement, you should check whether your state allows it. As the grid is difficult and complex to maintain, especially as production and energy use fluctuate during the day, many states allow into the grid only energy generated by a special project company or state-owned enterprises. For this reason, you may not be able to opt for a PPA in your state.
Once you know that PPA is allowed, you should proceed to look for a PPA company. Once the contract has been signed, the power generation system (usually relying on a renewable asset) is designed, purchased, and installed on site. Alternatively, you can also choose a remote site for generation capacity installation. It is a commonplace practice to have off-site generating assets for a commercial operation when the space is limited.
Once the power generation capacity is in place, all you need to do is pay for the power it produces. As the power is produced on your property and is used there, the price you pay to the PPA company is generally much lower than the energy offered at utility or electricity provider rates. With this in mind, you should know that in most PPAs, you have to purchase the entire quantity of electricity generated, regardless of how much energy you’ve used.
When opting for a power purchase agreement, you should also know that both on-site and off-site PPAs allow you to stay connected to the grid system. The system outright produces energy, and whatever amount of power you use, the rest is sent to the grid. In some cases, you may only have to pay for the electricity you consume, while the rest is being sold by the PPA company (the project owner) to the utility company.
We’ve mentioned several times that the PPA price of electricity is lower than the price paid in normal circumstances to the utility company or power supplier. However, the price you pay will still increase year after year for several reasons:
- The decline in the system efficiency,
- Rising maintenance costs (the older the system, the higher the maintenance costs),
- Rising energy costs, and
- Rising equipment costs.
With this in mind, there are several PPAs you may want to learn more about:
- Physical PPA,
- On-Site PPA (direct PPA),
- Off-Site PPA,
- Sleeved PPA,
- Synthetic PPA (Virtual PPA),
- Solar PPA,
- Wind PPA,
- Combined Heat and Electricity (CHE) PPA, and many more.
What is a Solar PPA?
A solar PPA (not the same as SPPA – Synthetic Power Purchase Agreement) is a type of power purchase agreement that powers your home using solar panels. Solar PPAs are the perfect solution for those who are:
- Looking to reduce their carbon footprint,
- Looking for ways to power their household with cheap renewable energy,
- Looking for simple physical PPAs to consider (solar panels are usually placed on top of an existing property),
- Looking for ways to obtain cheap electricity.
Financial PPA support is usually not available, or the offer is very limited, especially as solar power is getting much cheaper (currently, under $3 per Watt of installed power). As the PPA process is short, does not cost much, and results in low monthly payments (since you get a lower energy price), the financial support is pretty much non-existent. However, with a lower electricity rate, you can save money and have solar panels on your rooftop without the need to purchase them.
A solar PPA, however, has a big downside: the price you pay per year increases. In general, solar panels in the US pay off within 8-12 years on average. For the rest of the panels’ lifetime (25 years), you can enjoy completely free electricity. The same cannot be said for a solar PPA, as the electricity coming from renewable sources will cost you more and more every year.
PPA’s on Renewable Energy
Renewable energy PPAs are the most common form of a PPA. As the old-fashioned power plants have their own ways of selling the electricity they produce through a well-established network of utilities and power providers, there is no incentive for them to sell energy through PPA contracts. Renewable energy, however, with its high initial investment and as a relatively new source of energy, needs this kind of contract to ensure that the power generated is sold at a very stable price.
Note that price stability is the key here, as with synthetic PPAs, renewable energy projects get two revenue streams. This enables producing cheaper power as more price stability means a lower need for stacking cash in a company’s account. The renewable power sector can benefit from these contracts, even on a smaller scale, as renewable assets are placed on customers’ property.
The renewable energy power sector can benefit through PPAs. This is because PPAs are available for wind farms, solar farms, as well as biogas plants, and biomass plants. In the latter two cases, renewable assets provide two types of energy: electricity and heat. During the summer, the heat energy can be sold to dehydration facilities, especially in agricultural areas, while during winter, the same heat can be sold to cities to keep residential buildings warm.
Types of PPA
Power purchase agreements come in many forms and types, especially as energy needs are different and may not be able to be satisfied from a single source. With this in mind, PPA companies generally offer physical and synthetic PPA (aka virtual PPA). A physical PPA customer receives power produced on-site, while a synthetic or virtual PPA receives power produced elsewhere, usually at a price lower than the market price. Let’sLet’s consider all of these:
Your power producer may suggest you sign either a physical PPA or a synthetic PPA. Let’sLet’s learn about the differences between them, as well as how you can utilize renewable asset energy for your own energy needs, even if you do not have enough space for deployment of these technologies. There are three basic types of physical PPAs:
Onsite PPA is the simplest form of PPA there is. It is usually used with renewable energy, as the power generated comes from solar panels or wind turbines. The system owner remains the PPA company, but the power system is placed on your property. The PPA company then produces the energy for you, and the entire system is placed behind the electricity meter with net metering enabled.
In offsite PPAs, there is no direct physical delivery. The project company designs and places the power-producing system on a property nearby (or even very far away) and ensures that it is always operational and maintained. Alternatively, the power could be coming from a neighboring power plant. The electricity is then sent to the grid rather than straight to your home, but the power plant production quota is counted against your meter.
A sleeved PPA enables large consumers to purchase electricity from power plants, wind farms, etc., at discounted prices. This type of PPA involves the producer and the consumer. There is, however, a third party, and that is the power provider. Sleeved PPAs include the power provider in the equation for assistance and easier grouping of multiple power producers or power plant companies to supply electricity to one or more large consumers.
Synthetic PPA (Virtual PPA)
Synthetic power purchase agreements, a form of off-site PPA, are a bit different. Here, an energy producer builds a renewable energy power plant. The electricity that is produced is sent to the grid, and the utility company sends it to you. You pay your bill just as you would to the utility, which, in turn, pays out the energy producer. You also pay the energy producer, although at a lower price. Combined, the money you pay to the utility and the producer is a fixed price that is stated in your PPA electricity contract.
Benefits and Drawbacks of PPA
There are both benefits and drawbacks to a PPA. Although this is a good type of contract, as it enables a faster spread of renewable energy and climate change mitigation, the very fact that the project owner, client, and power producer have mixed roles has made many states completely outlaw or impose significant limits on PPA practices.
Some of the benefits of power purchase agreements include:
- Positive cash flow – $0 initial cost and a lower energy price mean that the balance sheet is about to look much better – energy is true, one of the highest costs in a company,
- No operation and maintenance costs – Power Purchase Agreements always mean that you do not maintain the equipment or even check it periodically,
- Predictability in energy pricing – Power purchase agreements, in general, have the base energy rate that the parties involved agree should be paid, with a fixed, annual increase in this rate. Cash flows initially may be significantly lower than with a regular utility. However, those looking to reduce costs should know that the price of power sold by your current provider may decrease in the future, which is especially risky, as a power purchase agreement lasts anywhere between 10-25 years, and you are bound to pay the prearranged price,
- The long-term nature of the contract means the price is secure-security in long-term pricing also means better budgeting and future planning for both smaller and major customers.
Some other benefits of a PPA include:
- Paying a higher energy price than the market value – to put this into perspective, if the energy in the market drops in price, you will still be paying the higher rate you’ve agreed on in the contract,
- PPAs are complex contracts – PPAs sell electricity through a complex contract that may prove to be more expensive in the long run than staying with your current provider. Transaction costs and early termination fees may be too expensive for an average person to afford, especially if they decide to move,
- PPAs are not available everywhere – many states limit the lower and upper market price of electricity. For this reason, you may pay higher than the fixed price offered by the same contractor in another state. Furthermore, PPAs may not even be available, as the market risks, systematic approach to clean energy generation, and other energy market issues prevent all states from adopting regulations allowing PPAs.
Who Needs PPA?
A power purchase agreement offers many benefits to those who decide to take one on. As power generated is generally much cheaper than utility company-supplied energy, it is also a great way to save when you purchase electricity. An organization or an individual may want to consider a power purchase agreement PPA if:
- They want to reduce electricity costs by avoiding electricity market prices,
- Want to enter the power sector as a producer and a seller but lack funding,
- Want to avoid costs and labor associated with maintenance of an energy system, and
- Cannot use the benefits offered by the local or federal government (such as the ITC – Investment Tax Credits).
Energy buyers in deregulated markets are exposed to energy price volatility and may suffer the consequences of energy instability by paying higher prices for the energy they consume. The perfect example is the 2021 energy crisis in Europe, where there was a lot of international competition to purchase electricity and ensure that quantity purchased was delivered. This has all led to a dramatic increase in energy prices, higher consumer prices, and a slow down in the economies of European countries.
PPAs, as long-term agreements, ensure long-term price stability with a predetermined energy price growth rate – usually 1%-5% per year. This means that subsidized domestic power production now has a rival, and this one needs no subsidies. For this reason, you may want to consider enlisting in a PPA (if you have no other financing options for renewables) and ensuring a stable energy price in the next 10-25 years, as this is the typical length of a PPA contract.
As deregulation kicked in in some US states, the governments saw the need to subsidize projects with long-term potential for bringing energy stability to the deregulated markets. However, with the deployment of more and more of these projects, the governments saw that the markets were slowly being saturated and are slowly reducing the subsidies, looking for different ways to fund and secure financial stability for future power sector investments.
In this light, PPAs, especially large-scale synthetic power purchase agreements, are the perfect way to ensure this stability and project company funding. The investor, the asset owner, and the generator – all the names for energy sellers under PPAs, thus receive two forms of funding, one from the energy buyer and one from the utility. Any project viable for a PPA can be converted to a PPA, ensuring a better, more stable energy price, especially in the long run.
Is PPA better than REC?
PPA is not better than REC, as they are two different concepts that cannot be compared. A PPA is a Power Purchase Agreement in which an energy buyer states they would purchase power from the PPA company (the investor or the asset owner). On the other hand, REC is a Renewable Energy Certificate, which is issued by specialized bodies for every megawatt-hour of electricity produced. You can sell RECs, but you cannot sell a PPA.
Are power purchase agreements a good deal?
Power Purchase Agreements are a good deal, especially if other forms of financing renewable energy are not available. However, as the electricity rate increases every year and can even become higher than the average electric rate in the power sector, long-term speaking, a PPA is not the best thing to opt for. Owning solar in regions where net-metering is enabled is much better, especially from the financial perspective.
Is PPA better than lease?
A PPA may be better than a lease. Under a power purchase PPA agreement, you will have variable monthly costs, although the electric rate will remain the same within any given year. Some people may prefer this, while others may enjoy the fixed monthly payments with solar leases more. Depending on your needs, a solar PPA may be a better option.
What is the difference between a traditional PPA and a VPPA?
A traditional PPA is usually an on-site endeavor that guarantees that your home is powered by renewable energy. A VPPA, on the other hand, purchases power from nearby sites or their own generation facilities and sends it to the grid. In a VPPA, the power is not directly supplied by the generator but rather by a power supplier. What you do get, however, are RECs, guaranteeing the green energy of the power you consume.
Large renewable projects lead the country’s energy revolution. As more funding is necessary, new forms of energy purchase agreements spring. PPAs or Power Purchase Agreements are the next best thing, ensuring a stable electricity rate for you as a consumer and a steady and stable revenue stream for the renewable asset owner. Perfect for those who want to reduce their carbon footprint but lack the funding or the how-to knowledge, PPAs are one of the favorite choices of many eco-conscious Americans.