Everything You Need to Know About Solar Energy Purchase Agreement
Over the past 25 years, electricity prices in some U.S. states have more than doubled. Data collected by U.S. Energy Information Administration (EIA) points to this fact. For a common energy user, that is definitely not comforting news.
Imagine that you are offered the same electricity, at lower and predictable rates. You are also told that the electricity comes from a renewable and green energy source. On top of that, the offer could add to the net worth of your property. All of this at zero upfront costs! Sounds like a dream? Luckily, all of this is quite possible, thanks to the SPPA or Solar Power Purchasing Agreement.
SPPA is one of the few popular options that you should consider while aiming to go green. SPPA can help you cut down the cost of electricity. But before that, you also need to evaluate the disadvantages. It all boils down to your financial condition and other important factors.
Keep reading while this article explains everything about solar PPA in detail. The information will help you in making a better decision.
What is a Solar Power Purchase Agreement?
A Solar Power Purchase Agreement is simply a financial agreement. The agreement involves two parties: the ‘Host’ and the ‘Developer’.
The developer sets up a solar panel system on the property of the host. The developer makes all the financing, design, and construction of the system. Ownership of the solar system rests with the developer. This entitles the developer to heavy incentives and tax credits.
The host pays the developer for the electricity generated by the system, every month. The price of the electricity is lower as compared to that provided by the utility.
A solar PPA typically lasts 10 to 25 years. The developer handles the operation and maintenance of the system during this time.
How does a Solar PPA Work?
Three key players are part of the process:
- The host (solar customer)
- The developer
- The utility
The host is the owner of the property who agrees with a developer upon certain terms. The developer is in charge of installing the solar panel or PV system on the host’s property. The host incurs little to no cost at all.
The host makes use of the electrical energy generated by the system. They pay the price to the developer on monthly basis. The price per unit kWh of Solar electricity is stated in the PPA. The escalator factor is also mentioned. It defines an increase in the price of electricity every year.
It is possible that sometimes the energy demand of the host is not met by the system. Conversely, the system might sometimes produce more electricity than demanded. The role of utility comes into play here. The excess electrical energy is sold to the utility grid. Whenever more kilowatt-hours are required, the utility makes up for it. This is made possible through the net-metering billing mechanism.
The host, being part of the solar PPA, needs to pay two separate bills each month: one to the developer, one to the utility grid. However, the overall cost of electricity is still lower for the host.
How much can you save with a Solar PPA?
It depends. Four main factors are at play here:
- Kilowatt-hours that you use
- Developer’s cost of electricity (mentioned in PPA)
- Utility’s cost of electricity
- Total energy produced by the system
Let’s bring in some numbers so that it is easy to grasp the idea. Suppose that your energy demand is 1000 kWh for a given month. The utility is offering you electricity at a rate of 13 cents per kWh. The developer agreed to charge you 10 cents per kWh.
The system installed on your roof generated exactly 1000 kWh. The net-metering saved you from any utility bill which would have been 130$. With the PPA at hand, you only have to pay 100$ to the developer. So, you saved a total of 30$ or 23% of the cost.
But it is not as simple as that always. It is very possible that due to more cloudy days, the solar panels don’t generate enough solar energy. In that case, your savings will definitely reduce. That’s why the fourth factor is of huge significance.
In simple words, more sunny days equal more solar energy, which equals more savings!
Benefits of PPA to Solar Customers
In the U.S., a 5kW solar energy system costs 10,000$ to 15,000$. As a Solar Customer (or Host), you don’t have to bear the huge upfront cost.
You will need to face no hassles of arranging the equipment. You won’t have to plan the details. The installation too will be arranged by the developer. The maintenance of the system, its operation, and performance will be on the developer. So, you have absolutely nothing to worry about!
There is no monthly fee other than the electricity bill. You will get predictable energy prices at lower rates. Savings will start from day one.
On hot summer days, the solar panels will keep your property cool by blocking the sunlight.
Drawbacks of PPA to Solar Customers
The solar energy system is the property of the developer. Therefore, they will enjoy the perks of SRECs and the federal investment tax credit, and not you.
You will have to pay two separate bills:
- One utility bill
- One solar PPA bill.
The solar energy system can increase your property’s value. So, it is quite possible that you would have to pay increased property taxes.
Solar PPA is a long-term contract that can last up to 25 years. The solar panels take up a lot of space on the roofs. This may limit your construction and modification plans for up to two decades.
While your property’s value may rise, it will probably be challenging to find a buyer. The buyer should be willing to abide by the solar PPA terms.
You might consider ending the PPA contract before its duration due to some reasons. In that case, you will have to pay the heavy Early Termination Fee mentioned in the PPA. So, before signing the PPA make sure if the early termination fee is bearable.
Remember that PPA is not the only financing option for solar customers. You should first evaluate your case and see whether the solar PPA suits it. Here are some considerations to help you out!
A solar PPA is a long-term contract. Needless to say, you should go through all clauses of the agreement before signing it. Understand the financial meaning of every minute detail. It may have an impact on your financial interests in the long run.
For instance, look for the clause which states how the cost of electricity will be affected in the long run. Calculate the numbers. Compare them with the forecasted cost of electricity the utility provides.
In case you have to exit the agreement, calculate the cost that you will have to pay in the form of Early Termination Fees. In some contracts, there are provisions on PPA buyout. You should also go through them.
Some developers may offer to transfer ownership upon completion of the PPA duration. See if you can make such a clause part of your contract.
Clauses that forbid making certain modifications or upgrades can also be part of the agreement. See whether you are ok with that.
Incentives such as federal investment tax credit and SRECs can save the owner of the system a ton of money. The PPA gives the whole of the ownership to the developer. So, to be able to avail of those incentives, a solar PPA is a no-go.
If you as a solar customer can afford the ownership of a solar panel system and are also eligible for solar incentives then you should go with other financing options such as a solar loan.
Your property may not provide the optimal conditions for operating solar panels. In that case, you may need to do some upgrades. For example, the property may need some repairs, the site may need to be levelled, etc.
These small upgrades will cost you money. This fact is also worth considering while opting for a PPA agreement.
Solar Renewable Energy Credits (SREC)
SREC is an incentive to motivate citizens to generate and use clean electricity. The intention is to reduce the carbon footprint. An owner earns one SREC for producing (not selling) 1,000 kWh of solar electricity. However, before claiming your SRECs, you have to check whether you as an owner are eligible or not.
The price of SREC depends on which state you are from, and also on demand and supply. For example, in Ohio, the price of one SREC has been 7$, whereas, in Washington, it has been 410$ as of May 2021. A 10 kWh solar panel system can earn the owner 12 SREC annually.
As mentioned above, the owner of the solar panel system is the developer (not you) as per the PPA. So, the revenue generated through SREC goes to the developer.
Let’s put that in numbers. If you are a PPA host (of a 10 kWh system) in Ohio, then you lose 84$ worth of solar incentives annually. If you belong to D.C., you lose around 5000$ worth of SRECs annually on a 10kWh system!
Other Financing Options
If you are wondering whether PPA is the only way to go, then don’t worry. There are financing options available other than the solar PPA. They include:
- Buy the whole system in one go
- Solar lease
- Solar loan
Buying the whole system has the most long-run benefits. However, it requires large upfront costs. You also have the option to upgrade the system’s production capacity in steps.
If you cannot afford the total cost then you can also consider a solar loan before signing a PPA agreement. Compare the pros and cons of all the options and decide which option works best for you.
Is Solar PPA perfect for you?
Your first consideration should be that of having the honour of being the owner i.e., purchase the system. It will give you the best returns with time. If that’s out of the question, go for the loan. If the loan is also not suitable, then comes the solar PPA.
Solar PPA is perfect for you if:
- You have literally no extra investment available, and you require immediate savings on your electric bill
- You are not eligible for the financial incentives including SRECs and federal tax credit
- You do not get approval for solar loan
- You are okay being in contract for 20-25 years
Are Solar PPAs a good deal?
Buying the solar panel system gives you the greatest financial benefits, in the long run. Still, solar PPAs are surely a good deal if you are not eligible for tax incentives. It is also a great deal if you can not pay the huge upfront costs of buying and installing solar panels.
Solar PPAs offer you electricity at lower rates from day one. Some developers even transfer the ownership to the host at the end of the PPA duration.
How do I get out of a solar PPA?
There are three ways in which you can get out of a solar PPA.
After completion of the PPA duration that spans over 20-25 years
Payment of Early Termination Fee as outlined in the PPA
PPA buyout. In some contracts, there are buyout provisions to allow customers to get the ownership. This is only allowed after a certain time of 7-10 years has passed. During that time the developer receives the federal tax incentives
Are solar backup batteries worth it?
High-performing solar batteries can increase the cost of the system from 50% to 100%. They require replacement after 5-15 years. There are federal tax incentives available in some areas that can get you up to 25% off the cost of batteries.
If you are living in a remote area with regular power outages then solar batteries are a necessity. However, if your locality supports net-metering and there are no regular power outages, there is no reason to go for solar batteries.
Is it harder to sell a house with solar panels?
If the solar panels are owned, it will be a great selling point. Who would mind free solar energy? The solar panels will add to the overall worth of your house.
However, if the solar panels are owned by a third party then it might be a problem. You would have to make the buyer agree on the terms of the contract. Thus, it might be harder to sell your house in that case.
Going green by choosing solar panels as a source of solar energy is a win-win situation. It benefits the user by cutting the costs of energy. The carbon footprint is also reduced.
Solar PPA is one of the available financing options. The homeowner enjoys the kilowatt-hours at a lower cost. However, they do not own solar panels. They also do not have to bear any cost of installation or maintenance.
The other party in the PPA, i.e., the developer, owns the solar panel. Owing to their ownership, they enjoy hefty solar incentives.
Other available financing options include purchasing the system, solar loan, and solar lease. Buying the whole system offers the greatest monetary benefits. But it requires large upfront costs.
Solar PPAs are sometimes only viable if you, as the owner, are not eligible for the federal tax credit. PPAs can bound you in a contract for over 20 years.