Solar Power Purchase Agreement: The Right Decision for the Right Customer

The solar industry has seen rapid growth with the advent of the power purchase agreement (PPA), a method of financing a solar photovoltaic (PV) system. But is a PPA right for you? Read ahead to learn more about what a PPA is, its benefits, and why traditional ownership of a solar system could be a better option for some customers.

What Is a Power Purchase Agreement?

A PPA is an agreement in which a solar developer manages and executes the design, permitting, finance, installation, maintenance, and monitoring of a PV system on a customer's property or roof at little to no upfront cost. The solar developer or another third party is the system owner that sells the power generated directly to the host customer at a fixed rate — usually lower than the local utility’s retail rate. With annual price hikes by local utilities and energy price volatility, customers find a predictable energy cost attractive.

Power Purchase Agreement Benefits

There are several key distinctions that make a PPA the optimal way for certain customers to go solar as opposed to ownership options. The benefits of a PPA include:

• Little to no upfront cost
• Reduced risk: A third-party owner is responsible for system monitoring and maintenance
• Lower energy costs: Can save 10-30% off utility electricity prices

One type of organization that would benefit from a PPA is a nonprofit. Oftentimes, it is difficult for nonprofits to access or raise the money required for an upfront solar installation. The PPA mechanism easily and immediately allows those organizations to go solar — letting them utilize renewable energy while saving money on their utility bills. Examples of customers well-suited for a PPA are schools, universities, houses of worship, and businesses with limited capital.

Advantages of Ownership

While the PPA model is attractive for many customers, it may not be the most prudent method for every company wanting to go solar, as there are long-term savings from owning a solar project. Depending on location and usage, the typical payback period is 5-7 years, after which the company benefits from fuel-free electricity for 20 or more years. Here are some other advantages:

• Ownership maximizes the financial payback of installing a solar system over the life of the asset
• Owners can leverage the solar Investment Tax Credit (ITC), which is a tax credit for a percentage of the cost of a solar system that reduces federal income taxes
• With MACRS accelerated depreciation, the owner of a solar system can expense the solar system’s depreciable value within the first 5 years of initial investment

What's more, while the PPA option allows a customer to put little to no money down and immediately save on their electricity bill, companies that buy commercial systems often can sell renewable energy certificates for the electricity produced in exchange for a steady revenue stream. The upfront expenditure for a solar installation, with discounts from federal and state tax incentives, is an investment that provides a rapid payback in addition to clean, renewable energy.

Explore Solar Options With PowerFlex

If you're interested in evaluating solar for your organization but are unsure if a PPA or traditional ownership is right for you, PowerFlex can provide a tailored analysis based on your portfolio, energy usage, and available incentives. We are agnostic to project structures, offer flexible financing, and provide turnkey solar solutions for customers of all types. To learn more about which solar options are available for your company, contact us here.