solar panel handshaking closing contract

Solar Power Purchase Agreements (PPA): The Complete Guide

• Updated on March 13, 2023 • [rt_reading_time postfix=”minute”] read

There are a variety of ways that businesses can realize the benefits of installing commercial solar panels.

You can buy the system outright, either paying cash or using a variety of financing mechanisms, or you can lease a system. In this article, we’re going to focus on a third option – the use of a power purchase agreement (PPA).

Table of Contents

What is a Solar Power Purchase Agreement?

With a solar power purchase agreement (solar PPA), you contract with a solar developer that pays for, installs, and maintains a solar system on your property. The system could include ground-mounted, rooftop, or carport solar panels (or any combination thereof), and it could include an energy storage system.

The developer owns the system but agrees to sell you electricity at a fixed, reduced cost per kilowatt hour (kWh) used, in exchange for letting them install the array on your property. These types of agreements are usually in place for 10-25 years, though they could span as much as 30 years.

A solar PPA is commonly used to finance larger renewable energy projects for healthcare facilities, educational institutions, and manufacturing facilities, though they can be used by a wide-variety of businesses looking to take advantage of the benefits of having on-site renewable energy.

solar panels on the sun

The Benefits of Solar Power Purchase Agreements

It’s no secret that companies across the country are working to increase their electric reliability, lower their energy costs, and reduce their carbon emissions. Many are discovering that renewable energy, and solar in particular, can help them accomplish their resilience, financial, and sustainability goals. Solar power purchase agreements are gaining popularity because they remove the biggest barrier to entry – the price tag of solar.

Minimal upfront costs

Solar PPAs are popular because they can be structured with minimal upfront capital costs to the business owner.

With a solar power purchase agreement, the developer takes on the majority, if not all of the upfront costs associated with designing and constructing the solar system. In fact, most PPA customers will be cash flow positive on day one.

Additionally, because of the way a solar PPA contract is structured, it won’t impact your balance sheet like a loan would. This means you can preserve capital or your borrowing ability for other business activities.

No maintenance costs or responsibilities

Under a solar PPA agreement, the solar developer retains responsibility for operating and maintaining the solar energy system over the life of the contract. They’ll perform annual inspections, repair any damage, and monitor the system to ensure its performance is continually optimized.

solar panels in the shade

Disadvantages of a PPA Contract

As with all good things, there are some potential downsides to committing to a solar PPA contract.

Long-Term Contracts

As noted above, contracts can run for two or three decades, so you’ll need to make sure a solar PPA is the right long-term move for your business.

Depending on how the agreement is set up, there may be a provision for your business to purchase the system at various points during or at the end of the contract. If you chose not to purchase the solar system, PPA contracts typically allow you either enter into a new power purchase agreement or request the developer remove the system from your property.

You should also have a clear understanding of your options and any early termination fees should you need to sell or relocate your business.

Lower cost electricity, but never free

Because the developer retains ownership of the solar system, you’ll never get to the point where you’ll have free electricity. If you were to buy the solar system outright, the electricity generated by the system will be very cheap, typically around $0.02 per kWh, the minute you’ve paid off the system.

Lower cost electricity, but not a fixed rate

With a solar PPA, you’ll know how much you’ll pay for your renewable energy for the life of the contract. But, keep in mind that that price may not be the same in year one as it is in year fifteen – the contract likely includes annual rate increases. Your costs will still be below market costs for grid energy in most cases, but they won’t be the same year over year.

The other thing you need to consider is your energy usage. If you require more energy than the solar system can deliver, you’ll either have to expand the solar system under the PPA, if you have space, or buy that additional electricity from the power grid; and keep in mind, its expected that energy prices will continue to climb.

Other Financial Arrangements

There are two other solar financing mechanisms similar to solar PPAs that you may want to consider.

Lease Agreements

Similar to a solar PPA, a solar lease scenario also involves a third-party owner and can often be structured with no upfront cost.

The primary difference between a PPA and a lease is that rather than pay per kWh used as you would in a solar PPA, you’ll pay a fixed rate over the lifetime of the contract (typically 7-25 years). Your lease payments aren’t tied to the amount of energy the system produces so they are consistent month-to-month. You’ll have predictable energy prices, but the downside is that you’ll pay a flat rate every month, even if you don’t use all of the energy that’s available under the terms of your deal.

If you opt to do a lease, you’ll need to decide whether you want to do an operating lease or a capital lease. The primary difference is that operating leases, which are essentially treated as equipment rental, are considered off-balance sheet financing. A capital lease, which acts more like a loan, would appear on your balance sheet.

Velo Solar offers a unique solar lease-to-own product for systems as small as 50 kW, which leads to ownership in as little as 7 years.

Energy Service Agreement

Energy service agreements (ESAs) are similar to leases in that you pay a fixed rate to the system owner in exchange for the “service” of solar energy. In this scenario, the provider ensures you’ll see a certain level of energy savings.

Due to the way ESAs are structured, they are most often employed when a business is financing a number of energy projects, including things like a solar panel system and energy efficiency upgrades.

close up solar panels

Don‘t Assume You Can’t Afford to Buy A Solar Energy System

While the idea of a solar PPA and solar panels with no upfront costs can be appealing, there are other financial mechanisms you can leverage to manage the cost of solar – and make direct ownership possible. Before you make the final decision, there are a few other factors you should consider.

Solar loans

If you don’t have cash on hand to complete a direct purchase, you could take out a commercial solar loan, which works just like any other business loan. It will either be secured by your company’s real estate or other assets, or it will be unsecured. Those that have collateral for a secured loan can often get more favorable rates from lenders than are available for unsecured loans.

Solar loans are typically set up with a 20-year repayment period.

Solar Investment Tax Credit

There are also federal tax incentives available to help reduce the upfront costs of solar.

Most businesses making a direct purchase of their solar power system are eligible for the federal Solar Investment Tax Credit, also known as solar ITC. The Solar ITC is designed to reduce the cost of commercial solar projects by reducing your tax liability with both a tax credit and an accelerated depreciation schedule.

With the Inflation Reduction Act, Congress extended the 30% Solar ITC for commercial projects until 2032, giving even more business owners the opportunity to take advantage of the program.

Many states also offer tax incentives for the purchase of solar panel systems.

If your business has high tax bills, buying your system outright and taking advantage of the Solar ITC may provide more financial and tax benefits than leasing your system or going with a solar PPA. You’ll want to work with a reputable commercial solar company to ensure your project qualifies and that you maximize your credits.

A quick note on tax credits and solar PPAs. In order to qualify for the tax credits you must own the system. If you’re having solar installed under a solar PPA, the developer is eligible for the tax incentives, not your business.

Net metering benefits

Net metering, also called net energy metering (NEM) or monthly netting, is a billing tool offered by some electric utilities in the US. Customers with on-site solar panels, or wind power plants in certain states, can send the excess energy generated by their renewable energy systems back to the electric grid. Then when they consume an equal amount of energy later in the day, week, or month, the utility gives them credit for that energy on their next bill.

It’s important to know that net metering programs are not available everywhere. The federal government legalized net metering nationwide to encourage solar adoption, but in practice, regulations are set at the state and local level. To further complicate things, each state may have a different net metering policy for residential and commercial customers, and each utility establishes its own net metering polices within the confines of the state regulations.

Complicated? Absolutely. That’s why you should check with your local utility or a reputable solar energy installer like Velo Solar to understand what is and isn’t possible in your area. They’ll be able to help you understand if you can benefit from net metering, and if so, how you might be able to offset the costs of a direct purchase of a solar system.

man happy standing by solar panels

Is a Solar PPA Worth It?

If you’re interested in the resilience, cost, and sustainability benefits that can be provided by a solar panel system, work with a reputable solar installer like Velo Solar to understand your options. If you don’t have high tax obligations, a solar PPA might be the way to go. Or, you might be surprised by how affordable solar ownership can be when you apply the available tax incentives.

Here’s the bottom line – there are plenty of options available to you if you want to add affordable solar to your energy mix.