The Holistic Guide to Solar PPAs

The first question almost any solar customer asks is, “How much will it cost?” Of course, it’s not quite that simple. With many incentives, potential net metering benefits, and other considerations, there are many ways to look at the cost — and ultimate payback — of a solar system.

In this blog, we’ll look in-depth at a popular way to finance solar installations: solar power purchase agreements (PPAs)

What is a Solar Power Purchase Agreement (PPA)?

What is a solar PPA, and is it a good idea for you?

With a solar power purchase agreement (PPA), the homeowner doesn’t have to pay the upfront costs of a PV system to start enjoying the benefits of solar energy. Instead, the homeowner enters a contract with a solar developer who takes responsibility for designing, financing, and installing the solar system. The homeowner then pays the developer for the energy the solar panels produce.

A solar PPA can be a win-win for developer and customer: For the developer, there’s guaranteed income and benefits from tax credits and other incentives. For the customer, they get great financing with no- to low-cost solar installation and extremely competitive energy prices. 

PPAs usually last 10-25 years. Once the PPA contract ends, the customer can extend the agreement, have the developer remove the system from the property, or buy the system from the developer. 

How does a Solar PPA Work?

A property owner — also known as the host, host customer, or customer — can choose a PPA term limit between five and 25 years. Once the agreement is made, the solar developer will install a solar system on the host’s property and start selling the electricity generated from the system back to the customer at prices lower than the utility can offer. 

With a solar PPA, net-metering benefits go to the homeowner.

A PPA is one of several third-party financing options for solar (to see how a solar PPA compares to a lease, read below). With a PPA, the solar host is still hooked up to the utility, so if the customer needs more energy than the system can provide, the grid is there for backup. Likewise, if the PV system produces more energy than the customer needs, it can be sold back to the utility via net metering. With a PPA, the homeowner gets net metering benefits, so like owned solar, the customer can wipe out their energy bills completely. 

The developer is responsible for finance, design, and construction of the solar system at the host site. In return, the developer gets guaranteed, locked-in reimbursement through energy payments from the host. A solar PPA provides a locked-in price for energy that lasts the lifetime of the contract, a great way to reassure hesitant potential clients. Rates can be structured in two ways:

  • Fixed escalator. The customer pays gradual price increases at a predetermined rate, usually lower than utility increases. 
  • Fixed price. This plan retains a fixed price throughout the duration of the PPA. With this plan, the more utility prices go up, the more the customer saves. And though the developer can’t access net metering benefits of the project, incentives like federal tax credits and SRECs (solar renewable energy credits) are yours for the taking. 

However, a PPA doesn’t mean the homeowner’s electric bill is swiped away. With a PPA, the homeowner is simply transitioning from paying the utility for electricity to paying the solar developer for electricity generated on the homeowner’s property. 

The primary advantage of a PPA is it affords the host free to low-cost solar installation and predictable energy pricing. There are three parties involved in a PPA:

The developer

  • Is responsible for financing, permitting, and installing the PV system
  • Owns the PV system
  • Gets rebates and incentives like tax credits and SRECs
  • Maintains the system (remember, the developer only gets paid if the system is cranking out electricity)

The homeowner

  • Doesn’t own the PV system
  • Has the PV system installed on their property
  • Uses the energy the system produces

The grid (utility)

  • Provides energy needs the PV system can’t meet
  • Provides net metering benefits to the homeowner

What are Solar PPA rates like?

Solar PPA rates are determined by striking a balance between the interests of the developer and the homeowner. In the past, PPA rates were determined by the average monthly or annual prices in the solar market. That’s not so today. When renewable energy became cost competitive with fossil fuels, PPA pricing structures locked-in to old solar market values became untenable. 

PPAs now must juggle a complex risk landscape that’s led to volatile spot prices resulting from rapid scaling of renewable energy. PPAs are trending away from fixed and escalator pricing to market-based pricing to protect against volatility. This opens more opportunity for fair pricing and flexibility, but does mean more work initially for the developer. 

Average national PPA rates

National PPA prices have declined almost 90% since 2009, about 15% per year. But recent policy changes, supply chain nightmares, inflation, and rising costs across the economy caused average PPA rates to increase 15.7% in 2021, to just over $34 per mWh. Despite rate hikes, PPAs are still seeing robust growth. 

Despite a slight uptick since 2019, PPA rates have generally fallen. (Source: https://emp.lbl.gov/sites/default/files/utility_scale_solar_2021_edition_slides.pdf)

“The good news is that PPA deals are still getting done,” said Rob Collier, VP of Developer Solutions at LevelTen Energy in an interview with Renewable Energy World. “Contract innovations tailored to current market conditions are enabling successful PPA transactions. And second, buyers have so far remained undeterred by market conditions, meaning that demand is still high.”

With continued demand for third-party solar financing, PPAs are a great option in a solar installer’s financing portfolio

Average Regional Rates

LevelTen Energy has compiled regional utility-scale PPA prices per mWh for the first quarter of 2022. We’ve translated mWh to solar PPA price per kWh below:

  • PJM: $.044/kWh
  • MISO: $.040/kWh
  • SPP: $.044/kWh
  • CAISO: $.030/kWh
  • ERCOT: $.032/kWh

LevelTen does not measure PPA data for NYISO or ISO-NE. For more information on ISOs (independent system operators), click here

What are the pros and cons of Solar PPAs?

This house has a solar PPA.

As solar continues to grow, PPAs remain a popular financing mechanism for solar installations. But there are pros and cons to everything, and PPAs are no different. 

Pros of Solar PPAs

  • Low- to no-cost solar installation and reduced risk for customers. The developer handling the upfront costs of installing solar eliminates the costly barriers-to-entry for customers, empowering them to start saving money as soon as the system goes live. 
  • Developer access to tax credits. Solar developers are usually better suited to identify and claim various tax credits, incentives, rebates, and subsidies. This saves on project costs, and the savings can be passed along to the customer. 
  • Higher property values. Solar can increase residential property values by up to 4.1%. PPAs are transferable in real estate transactions — or the homeowner can pay the PPA off during the transaction — giving customers a great way to invest in the value of their home with little to no cost. 
  • SRECs. Solar renewable energy credits (SRECs) are proof of electricity generated with solar energy. They are often bought and sold by utilities to help meet state renewable energy standards. Individuals can also purchase SRECs. With a PPA, SRECs are usually owned by the developer. It’s important to determine who owns rights to SRECs generated from the PPA. 

Cons of Solar PPAs

  • Potential expenses beyond solar. As a developer, a PPA requires you to plan, finance, and build a solar PV system. This may require you or the customer to make preliminary investments in the property prior to installation, such as roof repairs or tree trimming. 
  • Potential tax hikes. It’s well known that solar can boost property values. But with higher values comes its evil twin: higher taxes. This might not be the case in every state, though. Some states have laws protecting against sharp tax increases from solar. 
  • Customer purchases system at cost. Because the developer gets all of the incentives, if a customer chooses to buy out the PV system at the contract’s end, they’ll pay more than if they installed a new system themselves in the first place. 
  • Equipment obsolescence. PPA contracts can last as long as 25 years. If a manufacturer’s warranty expires or the system becomes obsolete within the contract timeframe, the customer is stuck with it. 
  • Can be more expensive than the grid. Though dollars and cents aren’t the only reasons for installing solar, it’s important to look at the numbers. At the time of publishing and from a dollar-to-dollar comparison, PPAs are at or below market parity only in the ERCOT and CAISO ISOs. 

Questions to ask before considering a Solar PPA

PPAs aren’t for everyone. Generally businesses and corporate entities use PPAs for installing very large solar installations. That doesn’t mean homeowners and small businesses can’t enter a PPA, but getting solar incentives may make more sense in the long run for small-scale applications. 

If a homeowner or business can’t afford to buy a solar system, a PPA can be a great way to access clean, renewable energy. However, if businesses and homeowners can afford their own systems, purchasing a solar system may be the best option. 

Here are some questions potential customers should ask before entering a PPA:

  • Do you plan on selling your house/business before the PPA ends? If so, you may have to buy out of the PPA (or you can transfer it to the new owner).
  • Are you likely to have a significant lifestyle change that reduces your energy needs from the electricity produced from the PPA solar panels? Customers are charged for the total output of the solar panels, not the amount of electricity consumed. 
  • Are there any terms in the PPA you aren’t comfortable with that need clarification? For example, who gets rights to SRECs?

What alternatives are there to a Solar PPA?

A solar PPA isn’t the only financing option for solar, nor is it necessarily the best. Let’s explore alternatives to PPAs. 

How is a solar PPA different from a lease?

This house has a solar lease.

Like solar PPAs, a solar lease is a type of third-party financing for solar installation projects. Unlike a PPA, however, a solar lease does not sell power back to the host. 

With a solar lease, host customers rent the solar system like they would a car. In both PPA and solar leases the solar system is owned by the developer. With a PPA, the system sells electricity directly to the host customer, while a lease gives access to solar benefits to a renter, where they can utilize the benefits of solar directly. 

Pros:

  • No upfront installation costs
  • Customer isn’t charged for electricity produced, just equipment usage

Cons:

  • More expensive than purchasing
  • Customer usually doesn’t possess incentives, rebates, and credits

How is a solar PPA different from a solar purchase?

These homeowners purchased their panels outright.

An outright solar system purchase is when the homeowner or business purchases and owns their own PV system. The biggest difference between purchasing a PV system and financing one through a PPA is upfront cost: A PPA is little to no cost for the customer, while the cost to install and own a PV system can be thousands of dollars, depending on your location and system size. But there are perks to owning:

Pros:

  • Owner doesn’t have to pay for excess energy produced from the PV system. What’s left over is sold back to the utility for a credit
  • Exclusive rights to incentives, rebates, subsidies, and NRECs, reducing the cost of installation and lifelong system expenses
  • Zero worry about fine print and contract obligations

Cons:

  • Higher upfront cost
  • More legwork required on part of customer in finding reputable developers
  • Customer is responsible for system maintenance

Purchasing a solar system is the best long term option for a customer if they have the finances to do so — of course, there are also advantages to loans if inflation happens to be high. Differentiate yourself from the competition by becoming the go-to expert on solar incentives and seamless solar planning in your community. 

How is a solar PPA different to solar loans?

These homeowners got a loan to buy their system. (Lesson: No matter how you finance it, all the houses now have panels on them.)

With a solar loan, the homeowner owns the PV system. Solar loans have the same basic parameters as home renovation or improvement loans. With solar loan financing, monthly savings from solar should be greater than the monthly loan payments so the customer can save money from the start. 

Another form of loan to consider is Property Assessed Clean Energy (PACE) loans. PACE loans are repaid through the homeowner’s property taxes. PACE loans aren’t available everywhere, but where they are, they’re an excellent solar financing option. 

Pros:

  • Low or no upfront cost
  • Customer owns system after paying back loan
  • Customer gets tax incentives, rebates, and SRECs

Cons:

  • Longterm, loans are not the cheapest solar financing option
  • Customer is responsible for system maintenance

Learn more…

Want to learn a little more about the different solar financing options? Here are some resources to get you started:

 

Ali McBride