Power Purchase Agreements (PPAs) for renewable energy are contractual arrangements between two parties, typically a renewable energy project developer and an electricity consumer or off-taker, in which they agree to buy and sell renewable electricity at a predetermined price and under specified terms. These agreements are a key driver of the renewable energy industry’s growth, as they provide financial stability and the low risk model is an attractive option to many customers. PPAs offer incredible opportunities for energy consumers to benefit from renewable energy, meet carbon reduction and sustainability goals, and secure lower, predictable energy prices, all without having to own or maintain the energy technologies.
In this blog, we highlight 10 key points of these agreements that are reshaping the energy sector and redefining the way businesses, communities, and governments procure and consume power. Below we explore the fundamental concepts, some key examples, and the immense potential that PPAs hold in accelerating the adoption of renewable energy sources and making these technologies more accessible to all types of energy consumers without requiring upfront capital or taking on lots of risk.
1. What is a PPA?
A Power Purchase Agreement (PPA) is when a third-party developer installs, owns, and operates a distributed energy system for a customer. The system is typically on or near the customer’s property. The customer purchases the electricity produced by the system for a contracted period of time at a typically lower rate than would be provided by the utility.
2. Is a PPA a lease?
No. In a PPA, the third party developer owns and operates the system and the customer purchases the energy produced. A lease is a different financial agreement where a customer would be responsible for ownership of the system and have a different structure for economic benefits.
3. What options are there if I can’t put a project at my facility?
A Virtual Power Purchase Agreement (VPPA) is a financial settlement agreement that allows a company to receive renewable energy credits (RECs) from an operational renewable energy project not located at their facilities. The electricity from the project is sold into the local wholesale market and the REC offtaker is either compensated by or pays the project company based on the difference between an agreed on settlement price and the actual electricity rate. VPPAs enable customers with large portfolios and distributed energy loads, or those who face physical or market constraints that hinder the deployment of on-site renewable energy measures, to meet sustainability goals, hedge against volatile energy prices, and often receive financial benefits. Offsite PPA options exist, as long as the project and buyer are in the same grid region. It’s a bit like sharing electricity with a neighbor! For more detail on this structure, please reach out to one of our experts.
Source: What is a VPPA – Urban Grid 2019
5. What are some of the key terms of a PPA?
Key contract terms of PPAs usually include agreement length, the commissioning process, the purchase and sale of energy, pricing, curtailment, milestones and defaults, credit, and insurance. Contract length is typically between 20-30 years and many terms have negotiation flexibility.
6. Can I enter into a PPA in my state?
Not all states allow PPAs. A list of those that do can be found here. If your state does not allow for a PPA, you have the option of leasing a project. Instead of paying a set rate for the electricity generated by your system, you pay a lease fee for the equipment.
7. What are some of the main financial benefits of choosing a PPA?
Since the majority of projects require no upfront payment and rates are typically lower than what a customer would pay the utility for energy, PPAs are often cash-flow positive from day one. Rates are stable and predictable and PPAs are an off-balance sheet financing solution, with payments classified as operating expenses.
8. What happens when a contract term is up?
When a PPA term ends, the customer has a number of options. Standard options include negotiating a term extension, purchasing the system from the developer and taking over ownership and operations of the system, or having the equipment removed from the property and returning to drawing all power from the grid and paying market rates from the utility.
9. How do I choose between a PPA or purchasing the system outright?
When considering your options for owning or financing a renewable energy system, a number of factors come into play. Capital purchase and power purchase agreements are both valuable mechanisms for securing value from renewable and distributed energy projects. Both may have pros and cons for customers based on an individual buyer’s unique circumstances, financial appetite, and strategies for specific facilities across a portfolio. When purchasing a project outright, the buyer is responsible for the ownership and maintenance of the system, which is typically contracted to a 3rd party. There is an upfront cost and these technologies can be costly. However, the customer is then entitled to all the value of the project. These projects can have very attractive rates of return, making them valuable investments for customers who have available capital. A power purchase agreement is a great alternative to capital purchase for a customer who wants the financial, environmental, and operational benefits of a renewable energy system, but does not want to own, maintain, or put up the money for a purchase.
10. How do I find the right technologies and partners to explore opportunities for a PPA at my facility or portfolio?
There is no shortage of possible technologies, developers, and project partners in the market. Ay GridMarket, we are technology and vendor agnostic and are eager to help you install a clean energy project. We identify the best-fit technologies and system size for your opportunity, offer project optimization recommendations, host a competitive RFP through our platform to engage top-tier vendors from the market, and help you negotiate the best available terms for a power purchase agreement. Book an appointment with us today!
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If you’re interested in learning about the benefits and differences between financing using CapEx or PPA, check out our free CapEx vs PPA guide here!
Remember, a PPA is a great option, but it is just one option for benefiting from clean energy – click here to learn more about other ownership models and find out more about your clean energy options!
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The information provided in this post is for general informational purposes only and should not be construed as legal, accounting, or financial advice. Please seek advice from professional advisors as appropriate with any legal or accounting questions.