How a Power Purchase Agreement Works
Part 1 of a 3-article series outlining the different ways of financially structuring a commercial solar purchase.
A Power Purchase Agreement (PPA) is a financial mechanism that allows businesses to access renewable energy without the need for upfront capital or operational expertise. It is a contractual agreement between a solar developer and a business, where the developer facilitates the installation of a solar energy system on the property. The solar system is owned, operated, and maintained either by the same developer, or else by a third-party institutional investor, which can sometimes benefit the project's economics with access to more favorable financing and tax benefits.
The process begins with an evaluation of the site, focusing on energy consumption patterns, available space, and solar potential. This assessment informs the design and capacity of the solar installation. Once the design is finalized, the contract terms are established. These terms define the new electricity rate, typically lower than the previous utility prices, and any escalation rates for future increases. The agreement also specifies the contract term length, which often spans 15 to 30 years.
After the agreement is signed, the developer handles the installation and commissioning of the system. This includes obtaining permits, procuring equipment, and managing construction. The business does not bear the cost of these activities, as ownership of the system rests with the developer or third-party investor. Once operational, the solar energy system begins generating electricity, which is consumed by the business. The business pays only for the electricity produced by the system at the agreed-upon rate. Any additional electricity requirements beyond what the system generates are met by the regular utility grid.
Throughout the contract's duration, the developer or third-party owner assumes responsibility for the maintenance and upkeep of the solar installation. This ensures that the system operates efficiently and continues to meet the energy demands of the business. The business benefits from predictable energy costs, often shielded from the volatility of traditional utility pricing.
At the end of the PPA term, the business may choose to either purchase the solar system outright, extend the agreement, or request its removal. If purchase is chosen, the system is typically offered at fair market value, which is substantially less than the original cost of installation.
Power Purchase Agreements offer a practical path to renewable energy adoption by eliminating the need for upfront investment and ongoing system management. They make solar power accessible to businesses of all sizes, and beyond financial savings, also help businesses achieve sustainability goals, and reduce their carbon footprint.
The simplicity and scalability of a PPA make it a compelling choice for businesses seeking to transition to clean energy without disrupting their operations or stretching their budgets. Businesses can make a simple switch to solar power while continuing to focus on their core activities.
