Power purchase agreement is a legal document that refers customer or buyer will purchase power from government or a company for a duration. But how does a solar power purchase agreement work? Long-term agreement, third-party installs the system, maintenance and repairs, and so on. Solar power is the most cost-effective alternative to traditional electricity sources. Unfortunately, not everyone can afford the high cost of buying solar panels on their own.
Having a PV system power taking agreement or PPA can relieve this financial burden. This financial agreement will help you get the advantages of solar panels for $0 upfront and lower monthly bills. It has a lot more benefits. But like the other side of the coin, it has some demerits too.
But how does a solar power purchase agreement work? What are the core details you need to know about PPA? In this article, we’ll break down how a Solar PPA works. Also, you will know about the upside and the downside of signing a PPA. Let’s dive in to know whether to choose PPA or buy a solar panel.
What is a Solar Panel Power Purchase Agreement?
It is mainly a contract between the solar panel provider and the host customer. PPA for solar energy is a lengthy solar panel leasing agreement within a fixed timeframe and price. This agreement obligates the provider company to cover the designing, permitting, financing, and solar panel netting installation, and costs of a solar energy system on the roof of the host customer. The customer will not need an initial investment or loan. Instead, he/she will have to pay a small monthly charge for operating a solar panel system. So, it is the most cost-effective business model for installing solar panels.
This “solar services” model helps the customer purchase the PV system services instead of buying the solar panel itself. As a result, the ownership of the panel always remains of the provider company. They will just sell the power to them at a fixed rate. The relief is that this rate is much lower than the local utility’s rate. Thus, PPA ensures consistent and frequently low-cost electricity. In contrast the other financial benefits like tax credits are obtained by the power seller company.
How Does a Solar Power Purchase Agreement Work?
PPA works by simply selling the solar electricity. Thus, it establishes a long-term fixed rate for electricity and covers the initial expenditures of installing a solar array. On the other hand, the providers get Investment Tax Credit (ITC). Here are the details:
1. Payments
Solar PPA claims monthly payments to the solar panel provider company on your rooftop. The pay rate depends on the solar panels’ monthly energy production. The local electricity rate can also influence the cost. For example, if the power company costs $0.15 per kWh, the approximate PPA cost can be $0.13 per kWh. Customer can find the solar PPA rate per kilowatt-hour (kWh) in their contract.
Solar PPA payments can rise during the term. The escalator provision of PPA specifies the rate at which your costs will increase. However, you will get the utility bill even though your solar PPA cuts your electricity expenses, for example, on cloudy days when you may use more electricity than your solar panels generate. It will result in two invoices.
2. Solar PPA savings
Solar PPA reduces your utility bill by replacing the costly fossil fuel electricity with affordable green energy. It generally saves 10% to 30% on monthly electricity expenses. So, if you are implementing PPA on an average home, you can save $15 to $45 monthly. However, the savings can fluctuate depending on the system, your usage, and local electricity pricing. The savings may multiply when your panel generates electricity than you need. You will just have to use the net metering policy to receive energy credits for additional electricity.
3. Incentives
You are only getting the low bills and net metering benefits of a PPA. The other benefits include the federal solar tax credit, SRECS, or local rebates. Unfortunately, you will not get any of them because the company controls the whole solar energy system. So, the company will claim the solar subsidies or tax benefits rightfully. However, some restrictions may depend on the rules governing your local incentives. So, before signing a contract, ask the installer about any incentives you may be eligible for.
4. Maintenance and repairs
During the agreement, your solar panels can be damaged or malfunction for any reason. In this case, the provider company will bear all the hassle of sorting out the issue. So, you will not have to worry about the cost of solar maintenance and repairs. For this, you must choose a reputable solar provider.
Some companies do not priorities your solar project. So, there remains a risk of being stuck with inoperable solar panels. You may also have to pay the maintenance and monthly bills simultaneously. To avoid this, check the contract for performance guarantees or explicit wording regarding repair timelines.
Key Components of PPA
Power Purchase Agreement (PPA) is a contract where buyer and seller agreed with the same opinion about purchasing power from the seller. However, there are some essential components of PPA that is highly needed for PPA agreement’s. Let’s check them out.
1. Terms and Conditions
It is basically the validity length of the solar PPA. The agreement usually stays valid for 10-25 years. This timeframe is the foundation for investment planning for renewable energy projects. This term can include the commercial operation date (COD) and conditions for early termination or extension. It will also have any renewal options. Longer terms offer greater revenue predictability for both the buyer and seller.
2. Energy Volume
Energy volume outlines the specific amount of electricity that will be generated and sold during the contract. Companies structure the outline on an as-available basis. Because, solar production depends on weather conditions. You will also get to know about the minimum and maximum delivery thresholds and capacity commitments in this part. It also outlines the provisions for penalties or incentives. This helps both parties plan around reliable expectations of output and consumption.
3. Pricing
Financial transparency is the base of any PP agreement. So, the pricing is an inevitable part of solar power purchase agreement. The monthly PPA bill depends on the pricing policy of the provider company. Some companies incorporate price escalators. The PPA also details payment terms, billing frequency, and any additional charges. It can include transmission fees or taxes. A balanced pricing balances risk and reward for both parties.
4. Creditworthiness
Creditworthiness is the guarantee that both the buyer and the seller can meet their contractual obligations. To avoid the financial complexity, the provider companies want to ensure a creditworthy buyer. At the same time, the solar panel company must have a strong financial basis to provide constant service and maintenance. So, a PPA often includes credit support mechanisms like letters of credit or escrow arrangements.
5. Risk Allocation
Risk allocation outlines which party will manage the risks that may arise during the contract period. These risks include market price volatility, equipment failure, fuel supply disruptions, regulatory changes, etc. Generally, the provider companies handle most of them. The contract also entitles the parties to performance guarantees, insurance requirements, and curtailment provisions. This clarity ensures that each party understands and accepts its exposure to challenges.
Advantages of Power Purchase Agreement (PPA)
There are some essential advantages of Power Purchase Agreement. This agreement can assist to the buyers and power seller. So, let’s take a look some benefits of PPA.
1. No Upfront Costs
Solar PPAs do not require any upfront money. So, you can forget about the financial stress and sit back relaxed. From solar panel installation to maintenance, the provider company will handle everything. What’s more? The customer will just pay a predetermined monthly cost during the agreement. However, there will be a convenient escalator plan to increase the price by 2% and 5%.
This is frequently lower than expected utility price hikes. PPA also ensures a constant price throughout the agreement. It saves the consumer money as utility rates climb over time. So, if you want to generate electricity from a renewable energy source (especially sun) but don’t have the capital, this is the best approach for you.
2. Immediate Savings
Immediate savings are the most alluring feature of a solar PPA. You will not have to pay anything to own the system. Also, the bill rate for solar electricity under a PPA is lower than your utility bill. Over time, these smaller monthly savings will be a good sum, especially if you live in areas with high electricity rates. This “pay-as-you-go” model ensures that you benefit from solar power immediately.
So, you will not have to wait years to get a return on investment. Also, if your solar system produces more electricity than you use, you can sell that additional electricity back to the grid by taking advantage of net metering.
3. Predictable Payments
The company will outline the PPA rates in your contract. So, you can predict monthly costs, unlike the unpredictable regular utility bills. Some contracts include an “escalator clause”. It increases the rate slightly each year. However, they will let you know about the increment in advance. The utility rate fluctuates according to the market conditions. On the other hand, PPA helps protect you from unpredictable spikes in electricity prices. So, you can budget the costs for the long term.
4. Increased Access to Solar
Many homeowners find the upfront cost of solar panel installation out of their budget. Some also find solar loans burdensome. Solar PPAs can solve this problem. They remove the financial and maintenance barriers associated with owning a solar system, making solar energy accessible to a broader segment of the population.
5. Less Responsibility
The perk of PPA is that it ensures the utmost green energy with almost no responsibility. It makes the provider company own and maintain the solar system during the agreement. So, you have no obligation to maintain, monitor, or repair the solar system. The provider monitors its performance remotely. They also handle any issues that arise. This “hands-off” approach saves you from the worry about technical upkeep, servicing, or replacing parts.
6. Cleaner Energy
Many companies produce their electricity using coal or natural gas power station, which has an alarming effect on the planet. You can reduce your both your carbon footprint and the dependency on the fossil fuels. So, you can reduce your carbon footprint. You can also support a sustainable energy grid using locally produced solar energy. You’re still actively contributing to the community’s transition to renewable energy and lowering greenhouse gas emissions.
Disadvantages of PPA
1. No Ownership of the Solar System
The biggest disadvantage is that you’re not the owner of the panel system under a PPA. You are just renting the system and using the energy it produces. So, you miss out on asset appreciation, full cost savings, and customization opportunities. You will also have to rely on a third party for system performance, repairs, and PV system monitoring.
2. Can’t Use Tax Credits or Other Incentives
Unfortunately, you will not get tax credits, rebates, or other financial incentives for solar installations because you do not own the solar panels. The solar panel company will benefit from the federal Solar Investment Tax Credit (ITC). So, you are going to lose the opportunity for the other big savings.
3. Lower Long-Term Savings
Though a PPA provides good immediate savings, you will have smaller long-term solar savings than purchasing solar panels outright or with a loan. After the payback period of your solar panels, you can effectively cut your electricity expenditures. However, you must continue to pay the monthly bill during the long contractual period. This perpetual cost can lower the overall financial advantage over time.
4. No Added Property Value
All home buyers prefer homes with solar panels as they lower the electricity bills. According to a study, solar panels on your property can boost its value by an average of 6.8 per cent. But you will have to own the panels. However, solar PPAS does not offer this advantage.
5. Difficulty Selling Your Home
It is very hard to sell the property during the PPA validity. Because it is compulsory for the new to accept the PPA agreement. However, it may not appeal to everyone. Your buyer can be skeptical about taking on a contract started by someone else. If the new buyer refuses to take the contract, the selling process will become more complicated. If they agree, you can transfer a PPA to a new owner. But the process can also be difficult.
6. Confined to A Contract
Coming out of a solar PPA is a task full of hassle and expenses. So, you will have to be confined to a contract for decades. This long-term commitment may not fit into everyone’s plans. In addition, terminating the agreement early can be costly or problematic. This contract can limit your options to relocate, upgrade your home, or switch to another solar provider.
Power Purchase Agreement Example
Solar Power Purchase Agreement
Sector: Solar energy
Name of Agreement: Solar Power Purchase Agreement
Agreement Between: ……….
Region: North America
Year of Agreement/Draft: 2025
Author of Agreement: Suite of documents developed by a top international legal firm. They have experience in energy sector infrastructure projects in developing countries.
Annotated by: James Clare
Purpose and Context: This Solar PPA oversees the selling of energy produced by a solar PV installation (the “Plant”) to the Purchaser. The Seller is obliged to develop, build, operate, and maintain the Plant, while the Purchaser commits to purchasing the generated energy on agreed-upon terms.
Circumstances of its appropriateness: The buyer have the right to the provider’s capacity and energy during the validity of the contract. This is not appropriate when future bilateral trading is desired.
Main Features:
- Term: Construction period + 20 years (typical for solar projects).
- Exclusivity: Purchaser has sole rights to the Plant’s output (unless bilateral trading is allowed).
- Renewable Energy Certificates (RECS): Ownership assigned to Purchaser unless otherwise agreed.
Obligations
- The providers are obliged to take all the installation and maintenance responsibilities. This includes the process of planning, designing, getting permission, funding, installing, replacing, repairing, and so on. All of the activities should be done according to the Utility Practice and schedules (3).
- Sometimes Dependable Net Capacity will be less than Rated Capacity. In this case, the seller must pay liquidated damages. (3.4).
- The seller must arrange for an Environmental Impact Assessment to be completed on the site (4.3.1).
- The seller offers development security in the form of a standby letter of credit with a duration of at least 364 days (4.16).
- The purchaser is responsible for paying the capacity and energy payments. The reported availability of solar energy will determine the capacity payment (11.1)
- The Purchaser must operate and maintain the Transmission System in accordance with the law, the Purchaser’s License, and prudent utility practice so that it does not harm the Facility. (7.2)
- Law changes cause upward or downward adjustments to Capacity Payments and Energy Payments.
- A coordinating committee is in place to facilitate communication and cooperation among the parties. (12)
- In restricted cases, the purchaser can step in if the seller breaches. There is no provision for returning the operation to the Seller later. (8)
- Purchaser may ask that the Facility be withdrawn from service provided that it continues to pay the Capacity Payment until the end of the agreement, less savings to Seller in fixed costs of operation and maintenance, (10.1)
- There is no liability other than for loss resulting from a breach of this Agreement (18).
Signature
Solar PPA Red Flags to Look Out For
To avoid solar PPA scams, you should learn about the fake PPA companies. Here are some solar PPA red flags to identify these companies:
Pushy Sales Tactics
Any deal regarding solar energy is complex and requires a big budget. Both the company and the consumer need enough time to get into the thousand-dollar investment. So, you should not rush and risk missing important details in the fine print. Many companies can pressure you to sign a PPA quickly.
They can use phrases like “limited-time offer” or “deal expires today.” Reputable companies allow time for review and comparison. So, avoid any company that constantly urges you to sign the agreement quickly. If the company is overly demanding, try getting a couple more bids.
Advertising of “Free Solar Panels”
Some companies advertise PPAS as “free solar” to attract customers. Unfortunately, there is no such thing. A PPA is not free. You will have to pay for the electricity at a set rate. Fraud companies commonly use this poor strategy to create a cloud in your mind. Long-term commitment to them can bring huge financial havoc for you. So, move on to another provider.
Vague Contract Language
If the contract is difficult to understand or omits key details, it can hide unfavorable terms. A legal expert can help you understand the ins and outs of the agreement as well as any loopholes. It will help you ensure full transparency. A reputable PPA should also include a guaranteed minimum energy production level. If the contract lacks this, the provider can be a scam.
High Escalator Clause
An excessively high escalator clause is a warning sign of solar scamming. Extreme escalation rates can exceed your local utility rates. It will lessen your expected savings. Then, there will be no meaning in having the agreement. On average, the rates can rise by 2.67% every year. This varies by location. Some states, such as Hawaii, have experienced an average yearly rate increase of 4.58%. So, keep past utility inflation in mind when evaluating the PPA’s escalator. Then, calculate long-term costs before signing.
Poor Customer Review
Take a close look at customer reviews. Third-party reviews like those in BBB, Solar Reviews, and Google can provide you with the most authentic information. Search for complaints about hidden fees, poor customer service, or system underperformance. This negative feedback indicates potential issues with the provider. If the company has a lot of low ratings or complaints, stay away from it.
Conclusion
A power purchase agreement (PPA) is a contract to get solar energy at a fixed price and time frame. It helps homeowners and companies get solar energy with little to no upfront cost. Thus, it can be a way to a cleaner, more sustainable future. However, PPA has a complex structure and pricing. Before signing a solar PPA, you must understand the energy risks, value, and negotiation concerns. Lastly, considering the key factors and red flags will help you hire the right company. Only then will you be able to get the most out of it.
PPA vs Solar Ownership: What’s the Difference?
The primary distinction between PPAs and other solar financing options is ownership. You become the owner of the solar system from the moment you buy it. In comparison, PPA will not give you any kind of temporary or permanent ownership. You benefit from affordable monthly payments that do not require upfront costs, lending fees, or interest payments. But not having the ownership makes you ineligible for most solar subsidies, like the solar tax credit. Most solar incentives work in the same way.
What is the difference between a solar lease and PPA?
Solar PPA is similar to solar leases. The payment system makes the difference between them. The production of electricity is the indicator of PPA payment. In contrast, solar leasing payments are fixed and consistent month after month. Both solar leases and PPAs have the disadvantage of not being eligible for tax breaks or incentives because you do not own the system.
Is A Solar PPA Better Than Buying Solar?
It depends on your interest and budget. For many people, a solar power purchase agreement is a good value. A PPA allows homeowners who cannot afford a solar system.PPA provides them a speedy and cost-effective road to sustainability. However, if you’re going to maximize your solar energy by taking advantage of tax breaks, energy credits, and other benefits, buying a solar system is the best choice for you. If you can afford to invest directly in a solar system, it is worthwhile.
What Happens When My Solar PPA Contract Ends?
There are three expected scenarios after the end of the PPA contracts.
- Have the company remove the solar panels at the end of the agreement.
- Run the solar panel without a monthly payment by buying it from the providers.
- Lastly, you can continue using your solar panels by renewing the agreement.
How Much Can I Save After Signing a Power Purchase Agreement?
The savings will depend on factors like electricity production and usage. However, the money you save on electric bills by generating power with solar panels will exceed your monthly PPA payments. After all, PPA keeps your electricity prices consistent, low, and predictable.