The solar power purchase agreement (PPA) is the most popular way to go solar in America. However, the majority of PPAs that are executed do not get financed. The goal of this article is to provide you with the accurate information you need to ensure a successful execution of a PPA and more importantly a financed system.
Solar Power Purchase Agreement Overview
The PPA is a contract and it is pretty simple to understand. Solar companies, like Clean Footprint, that develop, finance and produce solar power typically offer these agreements. They will design, purchase, install and then own/operate the solar array for the life of the system. The array will generate and deliver electricity which the organization wanting the electricity will purchase. The PPA is usually a 20+ year contract which essentially stretches the installation costs over the agreed term. This makes the price per unit of electricity very compelling and typically under the current rate.
There are three major benefits with using a PPA. First, most of the risk is taken by the solar company which is responsible for financing, operation and maintenance service and insuring the system. Second, the purchaser of the electricity is not responsible for the time and work required to oversee a proper installation including the design, engineering, procurement of technology and permitting among other installation related tasks. Third, the most attractive benefit of a PPA is that there is no upfront cost. Zero down investment to have lower electricity prices stabilized for 20 + years.
This PPA is a long term agreement and any organization considering it should make sure they pay attention to the issues that should be covered in the document. Below is a list of areas that we encourage you to understand completely before executing a PPA.
1.) Type of System: The PPA should have details with the type of system the solar company is about to install. Have them provide you with a list of all the equipment, its technical specifications, where it will be installed and how it will be installed on your property or building. Both entities need to be on the same page.
2.) Asset Ownership & Obligation: Make sure there is a definition of who owns the system. There are many parts and ensure that all necessary equipment is owned by the appropriate entity. The property will need to be accessed for maintenance purposes and the rights of the both parties need to be well defined. For example, the time of day is sometimes an issue.
3.) Timeline: The PPA should have a clear schedule that shows all phases of the project with expected completion dates. The big ones to know will be the installation and commissioning dates. The timeline should also provide you with the exact date it is expected to produce electricity. Make sure this fits well with your current work demands. Is it okay if the solar company is on the roof during normal business hours?
4.) Production Estimates: Total annual delivered electricity should be calculated so you can see the predictions based on predictable solar data.
5.) Escalator or Fixed Price: Over the term of the PPA there will be a fixed or escalating price. For example, it could be set at 3% each year. If there is a price escalator then you want to understand whether it is monthly, annually or bi-annually.
6.) Take-or-pay clause: There could be a scenario where the utility may not want to buy excess electricity from you or will buy it at a discounted rate. You should know if you have to pay for only the electricity you need or for all the electricity that the system produces regardless if you need it or not.
7.) Operations and Maintenance: The system has to be monitored and knowing who is responsible for this is very important. Also, you may want to have access to the monitoring data for marketing purposes or to include in your company’s sustainability report. A well-defined recovery plan is also important in the case something breaks down.
8.) Utility Correspondence: The utility company is typically still involved unless you are completely off the grid and the roles and responsibilities for dealing with the administrative and metering issues need to be assigned.
9.) Incentives and Rebates: The application process, accounting and tax paperwork for proper financing need to be on a timeline throughout all phases of the project. When dealing with federal, state and county dollars there are specific rules that apply. Knowing how this is handled is very important.
10.) Payment Schedule: How much and when payments are expected should be understood. If there is an upfront payment identify if it is associated with the electricity delivered. Knowing what days of the month and the frequency of the payments can help for accounting purposes. The bill for solar electricity may be separate from the utility’s bill. In certain seasons the solar bill may be higher than the utility bill and this should be forecasted.
11.) Property Sale: In the event that the property is sold and the solar assets are owned by a third party, there needs to be an option to assign the contract to the purchaser of the property.
12.) Contract: Be clear on the total length of the contract and also note the options for a sooner than expected exit. There may be options to terminate or even a buyout. Understand exactly what happens when the contract comes to an end. Will the solar company decommission and retrieved the system? Is there an option for you to purchase the system and, if so, how will the system be priced at that time? Also, see if there is a renewal opportunity for another PPA.
Solar power purchase agreements have been executed by some of the largest corporations in the world like Wal-Mart and Google because the risk is lower than all other financing options. However, not having a legal review and clear understanding of the terms can be unfavorable. We hope this information is helpful and allows you to execute a successful solar power purchase agreement and more importantly one that is financeable.