19 Mar

The Anatomy of a Power Purchase Agreement

A power purchase agreement, also referred to as a PPA, is a great way to finance a solar installation. While this may seem like a daunting task, rest assured that most of the responsibility falls on the solar company. In any PPA there are two main parties: the host client (buyer) and the solar company (seller). In simple terms, the host client purchases electricity from the solar company. However, there is much more that happens behind the scenes. The solar company owns and operates the solar array and undertakes the costs associated with installing and maintaining it. The host client leases the roof or ground space to the solar company.

Since the solar company assumes most of the responsibilities and all of the risk, a PPA is the preferred way to finance solar if the host client does not want to own the array. Since there is no money down, the host client saves 15-20% immediately off their current electricity rate. The solar company arranges financing for the solar array from a third party.

The power purchase agreement specifies dates, prices, locations and the responsibilities associated with going solar.

A formally binding contract is signed on the effective date. It ensures that the host company will purchase electricity from the solar company and the solar company will only sell to the host client.

Before an exchange of money or electricity can take place, the commercial operation date (COD) must be reached. COD specifies when the solar company is able to begin selling electricity to the host client. Until this point, the solar company is busy securing permits and working with the utility company towards interconnection of the solar array. The COD also marks the start of the term of the solar array which is most commonly 25 years. The date that the PPA expires is generally referred to as the termination date.

In most power purchase agreements there are three options for the host client at the end of the term:
• Renew for another 5 years (or any other number of years agreed upon by both parties)
• Have the solar array removed from the roof or ground (usually at an extra cost to the host client)
• Purchase the array from the solar company (in which case all ownership and maintenance responsibilities transfer to the host client)

The power purchase agreement specifies how much the host client will pay the solar company for every kilowatt-hour (kWh) produced by the solar array. This figure is also translated into monthly and yearly costs. The price can be calculated in one of two ways:
• Flat price (same every month for the PPA term)
• Escalating price (increases at a certain interval agreed upon by both parties)

The power purchase agreement also specifies the estimated amount of electricity produced annually by the solar array for the entire term of the agreement.

The power purchase agreement specifies the exact location of the solar array. It includes a system design on an aerial of the roof or ground space the host client is leasing to the solar company. This allows the host client to picture where the array will be prior to construction.

The power purchase agreement specifies that the solar company is responsible for the maintenance of the solar array. This includes monitoring the array for any damage and insuring it is fixed it in a timely manner. The PPA also specifies when and how the host client will make payments to the solar company and how any late payments will be handled.

Once the solar company determines the final system design, estimated production and pricing, the contract is signed and the solar company is able to begin the financing process to make the solar array a reality!

Eliza Porter

Eliza Porter

Eliza is the Chief Learning Officer for Clean Footprint. As the Chief Learning Officer, she is responsible for writing and editing blogs, e-books, videos and white papers as well as other learning content created for Clean Footprint’s developer partners and clients. Eliza attended New York University in Paris, France and studied Global Liberal Studies before moving to Florida and joining the Clean Footprint team. She also studied Business and Entrepreneurship at the University of Central Florida.