An arrangement whereby a developer arranges for the design, permitting, financing, and installation of a solar energy system on a customer’s property for little or no cost is known as a solar power purchase agreement (PPA). The electricity generated is sold to the host customer by the developer at a set price, usually less than the retail rate charged by the local utility. While the developer gets the money from these power sales as well as any tax credits and other incentives produced by the system, the customer’s purchase of electricity from the grid is compensated by the reduced electricity price. PPAs usually last between ten and twenty-five years, during which time the developer is still in charge of system upkeep and operation. A client may have the option to purchase the solar energy system from the developer, have the PPA extended, or have the system removed at the conclusion of the PPA contract period.

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PPA Advantages for Solar Clients

No or minimal upfront capital costs: The developer bears the responsibility for the solar PV system’s size, acquisition, and installation. The host customer may adopt solar without having to pay anything up front, and as soon as the system is up and running, they can start saving money.

Lower energy costs: Solar PPAs are organized in one of two ways and offer a set, predictable power cost for the term of the agreement. The customer’s price increases at a set rate, usually between 2% and 5%, under the fixed escalator plan. This is frequently less than anticipated increases in utility prices. In contrast, the fixed pricing plan keeps the price constant for the duration of the PPA, saving the consumer more as utility costs increase over time.

Limited risk: Operating risk and system performance are the developer’s responsibility.

Improved leveraging of available tax credits: Developers are usually in a better position to lower system costs by taking use of existing tax incentives. For instance, the Section 48 Investment Tax Credit would not ordinarily be available to municipal hosts and other public institutions that do not have taxable revenue.

Potential rise in property value: Research has demonstrated that installing a solar photovoltaic system can raise the value of residential real estate. Due to the long-term nature of these agreements, PPAs can be transferred along with the property, giving clients the opportunity to make low- or no-cost home improvements.

Policy and Market Adoption

PPAs simplify the procedure for the host customer and offer a way to avoid the initial capital expenditures associated with building a solar PV system. However, the PPA model is subject to legislative and regulatory obstacles in some jurisdictions that would regulate developers as electric utilities. Another type of third-party financing that is somewhat similar to a PPA but does not entail the selling of electricity is a solar lease. Customers lease the system instead, much like they would a car. In both situations, a third entity owns the system, yet the host consumer benefits from solar energy with little or no upfront fees. These third-party financing options have swiftly emerged as the most often used way for consumers to benefit from solar energy. For instance, Colorado joined the market in 2010 and by the middle of 2011, third-party installations accounted for more than 60% of all residential installations. This percentage increased to 75% by the first half of 2012. Every state that has implemented third-party finance methods has seen an increase in this tendency.

PPA Aspects to Take into Account

Solar renewable energy credits, or SRECs, are proof that a specific quantity of electricity was generated utilizing solar power. In order to fulfill their responsibilities under state-level renewable energy regulations, load serving entities—typically regulated utilities—usually purchase and sell them. Customers that willingly buy SRECs also utilize them for marketing purposes or for other purposes. SRECs are often controlled by the developer in PPAs. A client should be fully aware of the risks associated with SREC ownership, the tradeoffs regarding PPA price, and who owns and may sell the SRECs produced by the PV system before engaging into a PPA.

How to finance: Buying a PV system outright offers advantages of its own, even if both third-party financing options provide several advantages. To determine which financing option is best for them, anyone thinking about installing a solar PV system should weigh all of the available possibilities.

Site upgrades: Although the developer is in charge of installing, running, and maintaining a solar PV system, the host customer may need to make improvements to their land to facilitate the system’s installation, reduce installation costs, or adhere to local regulations. For instance, this may entail pruning trees that shade the PV system or fixing the roof.

Potentially higher property taxes: Although a PV system could contribute to the site’s increased property value, a reevaluation of the property value could result in higher property taxes. However, rules regarding these potential increases in property taxes vary from state to state.