Power Purchase Agreements: An Updated Overview
Note - this is a refreshed post, originally made in April 2022. It incorporates the relevant aspects from the Inflation Reduction Act.
Download the complimentary customer-facing PPA slide deck that accompanies this post! (CLICK HERE)
Power purchase agreements (PPAs) are an integral part of the commercial solar market, which consists of projects with schools, municipalities, private companies, non-profits, etc. PPAs make up 70% of sales in the annual $8B middle market. However, many developers and installers struggle with the mechanics of a PPA: when to sell it, how to price it, and what to expect after the sale is made. As such, PPAs often end up with a more complicated sales process than their cash purchase counterparts.
In this two-part series (check out part 2 here), Conductor Solar will explain what PPAs are, when to use them, and what to expect during the financing process. For the purposes of this series, Conductor will assume that any system discussed is of sufficient size and creditworthiness to warrant a third-party project investor. Conductor endeavors to give its partners the tools to make selling PPAs simpler, as well as to prepare installers for the post sale work that project investors typically require before an acquisition is complete.
How PPAs Work
The primary difference between a cash purchase and a solar PPA is that an unaffiliated project investor owns and operates the system, and sells the power generated from it to the customer for a fixed and known price over 20+ years.
The customer typically receives a 5-20% savings on their cost of power in year 1, with a projected increase in savings over time due to rising utility costs. Under a solar PPA, the project investor receives all the tax benefits associated with the system, particularly the Federal Investment Tax Credit and depreciation benefits. This is important as many commercial entities are unable to use the tax benefits associated with solar because they don’t have enough tax liability. Thanks to the Inflation Reduction Act (IRA), public and NGO entities who do not pay taxes are now able to request a direct payment from the IRS in lieu of a tax credit. This lessens the need for a PPA, but those entities are still unable to value any depreciation and often are still choosing to pursue PPAs for reasons mentioned below.
When to use PPAs
PPAs are often the answer for commercial systems due to any number of the large required capital expense, lack of technical expertise or lack of tax appetite of the customer. However, other factors may influence the decision, too. The table below outlines the key determinants for a cash purchase or a PPA:
In both a cash purchase and a PPA, the customer is the system host, just with different obligations. Under a PPA a customer has fewer responsibilities, namely paying their bills and making sure the system owner can access the site to provide required maintenance on the system. The project investor is responsible for insurance, operation and maintenance, repair coordination, and managing incentives.
Discussing PPAs as an Option with Customers
PPAs are not only for those organizations that have low or no tax liability. Some organizations prefer to finance the system and have someone else operate it. Some questions the customer can answer to help with decision making are:
If you’re a for-profit organization, do you have enough tax liability to use tax benefits from the system?
Does your organization allow you to make a capital expenditure of this size?
Are you comfortable taking on obligations to your balance sheet?
Do you have a loan financing option, and does it provide you with savings/a reasonable ROI?
Is your organization prepared to provide financials to a project investor for credit review?
By understanding the answers to these questions, installers can better help their customers decide whether a PPA is right for them. The biggest difference between financing with a loan as compared to a PPA is that loans represent on-balance-sheet financing and the customer has to carry a long-term liability. PPA payments are treated as an expense, so the PPA never shows up on the balance sheet.
Contact the Conductor Solar team (Support@conductor.solar) with any comments or questions related to selling and financing PPAs or commercial solar in general.
