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Power Purchase Agreements (PPAs)

All the Benefits of Solar Energy – but without paying for it!

If you need solar energy to reduce your energy costs and promote your green credentials, but don’t want to finance it or have the installation on your balance sheet, then the PPA route could be for you. A Power Purchase Agreement (PPA) involves a long-standing contract of typically 10 to 25 years between an electricity provider and a customer, which could be a utility, governmental agency, or a private company. During the term, the power purchaser agrees to buy electricity at a price set in advance, which helps in budgeting and financial planning over the contract period.

 

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What is a Power Purchase Agreement (PPA)?

A Power Purchase Agreement (PPA) is a contractual agreement between a solar project developer and an offtaker (typically a business or organization) to purchase electricity generated from a solar PV system. The developer owns, operates, and maintains the solar installation, while the off-taker agrees to buy the electricity produced at an agreed-upon rate over a specified duration, typically ranging from 10 to 25 years. Due to contract arrangement costs, PPAs are usually used for larger solar energy systems, typically over 200KW in size.

Key Benefits of Solar PPAs

Cost Savings - Solar PPAs offer a cost-effective way for businesses to access clean, renewable energy without the upfront capital investment required for solar PV system installation.

Reduced Carbon Footprint - By opting for solar PPAs, businesses can significantly reduce their carbon emissions and demonstrate their commitment to sustainability.

Fixed Energy Costs - Solar PPAs provide a fixed rate for electricity, shielding businesses from the volatility of energy market prices. This long-term cost stability allows for better financial planning.

 

A Breakdown of How It Works

1.

Development and Design

The solar project developer conducts a thorough assessment of the site's solar potential, evaluates the energy needs of the off-taker, and designs a customised solar PV system to meet the specific requirements.

2.

Financing and Installation

The developer secures the necessary financing for the project, including funding for equipment procurement, installation, and ongoing operation and maintenance costs

3.

PPAs Negotiation

The developer and the off-taker negotiate the terms of the PPA, including the price per kilowatt-hour (kWh) and contract duration. This negotiation ensures a fair and mutually beneficial agreement for both parties.

4.

Construction and Commissioning

Upon finalising the PPA, the solar PV system is installed, tested, and connected to the electrical grid. The project is then commissioned, and the off-taker starts receiving solar-generated electricity.

5.

Operation and Maintenance

The developer is responsible for the ongoing operation and maintenance of the solar PV system throughout the PPA duration. This includes regular inspections, performance monitoring, and repairing any issues to ensure optimal energy generation.

A Worked Illustration

Assuming a business is considering a 500kW solar PV system, the estimated cost for installation, including equipment and labor, would amount to approximately £400,000. On the other hand, a solar PPA provider offers a PPA rate of £0.10 per kilowatt-hour (kWh) for a 20-year contract.

Comparison

By opting for the PPA instead of an outright purchase, the business saves the upfront investment of £400,000. Over the course of 20 years, the business saves a total of £1,800,000 on electricity costs. Additionally, the payback period is effectively reduced to zero since there is no initial investment.

This example demonstrates how a solar PPA can offer significant cost savings and faster return on investment compared to outright purchase. Moreover, by partnering with a solar PPA provider, businesses can benefit from the provider’s expertise in system maintenance and operation, further reducing their operational responsibilities.

Remember, the actual financial benefits may vary depending on specific project details, such as regional electricity rates, available incentives, and the negotiated PPA rate. It is advisable to consult with us to obtain precise calculations tailored to your unique circumstances.

Power Purchase Agreement

  1. No Initial Investment Required
  2. Annual Electricity Cost from Solar: 450,000 kWh x £0.10 per kWh = £45,000
  3. Total Cost Saving per year: 450,000 kWh x ( £0.30 – £0.10) = £90,000
  4. Cost Saving over over 20 years: £90,000 x 20 years = £1,800,000

Outright Purchase

  1. Initial Investment: £400,000
  2. Estimated Annual Solar Generation: 450,000 kWh
  3. Annual Electricity Cost Savings Assuming all solar Energy consumed on site: 450,000 kWh x £0.30 per kWh (average retail electricity rate) = £135,000
  4. Simple Payback Period: £400,000 / £135,000 = 3 years
  5. Savings over 20 years – £2,700,000 – Investment of £400,000 = £2,300,000

Pros of a PPA

  1. No Upfront Investment: With a PPA, businesses can access solar energy without the need for a significant upfront capital investment, making it a more financially feasible option for organisations with limited resources.
  2. Cost Stability: A PPA provides a fixed rate for electricity over the contract duration, shielding businesses from the volatility of energy market prices. This allows for better budgeting and financial planning.
  3. Outsourced Maintenance and Operation: In a PPA, the solar project developer is responsible for the ongoing operation and maintenance of the solar PV system. This reduces the burden on businesses, freeing up resources and expertise for core operations.
  4. Environmental Benefits: By opting for a PPA, businesses can demonstrate their commitment to sustainability and reducing their carbon footprint by utilising clean, renewable solar energy.

Cons of a PPA

  1. Longer Contract Commitment: A PPA typically involves a long-term contract, usually ranging from 10 to 25 years. This may restrict businesses from making changes to their energy strategy or adopting new technologies during the contract period.
  2. Potential for Higher Overall Costs: While a PPA eliminates upfront costs, the total cost of electricity over the contract duration may be higher compared to outright purchase, depending on the negotiated PPA rate and future changes in energy prices.
  3. Dependency on the PPA Provider: Businesses relying on a PPA are tied to the PPA provider for the duration of the contract. If the provider faces financial difficulties or fails to meet service expectations, it could impact the business’s access to reliable electricity.
  4. Limited System Ownership: With a PPA, the solar PV system remains owned by the project developer throughout the contract duration. Businesses do not have direct ownership or control over the system, limiting their ability to make decisions regarding system modifications or upgrades.

In Summary

Solar Power Purchase Agreements (PPAs) provide an attractive option for businesses seeking to adopt renewable energy sources and reduce their carbon footprint. By partnering with solar project developers, businesses can access the benefits of solar energy without the upfront costs. If you are looking for solar PPA and solar finance information for systems over 200KW in size, this guide has provided you with a comprehensive understanding of how solar PPAs work and their advantages.

 

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If you’re a business owner or in charge of a commercial property, contact us for a complete financial illustration of how a PPA could work for a solar installation on your property.

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