What is a Solar PPA Power Purchase Agreement?


A solar (PPA) power purchase agreement is a financial agreement where a solar developer arranges for the design, permitting, financing and installation of a solar roof, solar farm or solar parking lot on a customer’s property at little to no cost. The developer sells the solar energy generated to the host customer at a fixed rate that is typically lower than the local utility’s retail rate. This lower electricity price serves to offset the customer’s purchase of electricity from the grid while the solar developer receives the income from these sales of electricity as well as any tax credits and other incentives generated from the system. PPA agreements typically range from 10 to 25 years and the developer remains responsible for the operation and maintenance of the system for the duration of the agreement.

Benefits of PPA's to property owner
  • No or low upfront capital costs for solar system: The developer handles the upfront costs of sizing, procuring and installing the solar system. No upfront investment and the customer able to save money as soon as the system becomes operational.
  • Reduction of energy costs: Solar PPA's provide a fixed, predictable cost of electricity for the duration of the agreement and are structured in one of two ways:  
    1. Fixed escalator plan, the price the customer pays rises at a predetermined rate, typically between 2% - 5%. This is often lower than projected utility price increases. 
    2. Fixed price plan, on the other hand, maintains a constant price throughout the term of the PPA saving the customer more as utility prices rise over time.
  • Limited risk: The developer is responsible for the solar system performance and operating / maintenance risk.
  • Better leverage of available tax credits: Developers are typically better positioned to utilize available tax credits to reduce system costs.  For example, municipal hosts and other public entities with no taxable income would not otherwise be able to take advantage of the Section 48 Investment Tax Credit.
  • Potential increase in property value: Solar systems have shown to increase property values. The long term nature of these agreements allows PPA's to be transferred with the property and thus provides customers a means to invest in their home at little or no cost.
  • Extension: At the end of the PPA contract term, a customer may be able to extend the PPA, or have the developer remove the system or choose to buy the solar energy system from the developer. 
  • Transferable:  PPA's agreements are typically transferable if a sale or the property occurs.
A solar lease is another form of third-party financing that is very similar to a PPA, but does not involve the sale of electric power. Instead, customers lease the system as they would an car.  In both cases, the system is owned by a third party while the host customer receives the benefits of solar with little or no up-front costs. These third-party financing models have quickly become the most popular method for customers to realize the benefits of solar energy.

Colorado, for example, first entered the market in 2010 and by mid-2011 third-party installations represented over 60% of all residential installations and continued to rise to 75% through the first half of 2012. This upward trend is evident throughout states that have introduced third-party financing models.

Apparently, Walmart is a big fan of PPA's and has entered into a lot of agreements at some stores. 

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