The Victorian Government defines a solar PPA or solar power purchase agreement as an activity where “a business provides, installs and maintains, at no initial cost, a solar panel system to a customer and in exchange, the customer buys the electricity provided by the solar panels for an agreed price and for an agreed period. Any electricity that is not used is sold to a licensed retailer.”
For the purposes of this article, we will refer to the business that installs the solar system as the ‘the developer’.
Given that the customer buys the energy generated from that solar system at a rate (c/kWh) generally lower than the rate they would get from the grid, they are able to enjoy the savings of the solar system from the first day it is generating energy, without having to invest their own capital.
The income the developer receives from the sale of electricity acts as their return on investment for paying for the installation of the solar system.
Furthermore, as the developer owns the solar system, they are entitled to receive the renewable energy credits and other incentives that are a byproduct of the solar system.
Solar PPA terms typically range from 10 to 20 years. During this time, the developer is usually responsible for the operation and maintenance of the system.
At the end of the contract, the customer is given the option to extend the Solar PPA, buy the solar system from the developer, or pay for the solar system to be removed.
Minimal to no upfront cost
Given that the developer pays for the upfront costs of design, procurement and installation of the solar system, the customer avoids these capital costs and enjoys the savings from the day the system starts generating energy. This frees up capital for other business investments.
Transfer of risk to the developer
As the developer also takes responsibility for the operations and maintenance of the solar system, they assume the risk of performance. Within the contract term, when the inverter or other components require replacement, the developer will be required to pay for this.
Given the developer’s income is linked to the performance of the solar system, they are incentivised to ensure the system is working to its maximum efficiency, therefore activities such as cleaning of the panels will be undertaken at regular periods.
This can give the customer the peace of mind that they will be receiving the maximum potential savings as a result of having a solar system installed under a Solar PPA.
Reliable and reduced energy costs
Solar PPAs can provide a predictable energy cost over the contracted period.
The developer will typically include a fixed price escalation in line with the Consumer Price Index (CPI). Grid prices may increase at a greater rate than the PPA price, resulting in growing cost savings over time.
Increase customer’s business value
Installing a solar energy system can have the potential to increase a customer’s business value. This is a result of the lower energy bills leading to an instant and long lasting cash flow increase for the customer’s business. Solar PPAs can be transferred with the business ownership.
Taking part in sustainability
Through a Solar PPA, not only is the customer’s business able to enjoy the financial benefits of clean renewable energy, but the business is also able to play an important role in building a sustainable future.
Paul Gizinski is director at commercial and industrial solar and storage specialist, Energy Terrain.
This article was originally published as an Energy Terrain blog. Republished here with permission.