Solar Power Purchase Agreement: The Right Decision for the Right Customer
The solar industry saw rapid growth with the advent of the Power Purchase Agreement (PPA), a method of financing a solar photovoltaic (PV) system. A PPA is an agreement in which a solar developer manages and executes the design, permitting, finance, installation, maintenance and monitoring of a PV system on a customer's property or roof at little to no upfront cost. The solar developer or another third party is the system owner that sells the power generated directly to the host customer at a fixed rate—usually lower than the local utility’s retail rate. With annual price hikes by local utilities and energy price volatility, customers find a predictable energy cost attractive.
There are several key distinctions that make a PPA the optimal way for certain customers to go solar as opposed to ownership options. Yet depending on the company type and its needs, there are advantages to both a PPA and buying a PV solar system.
Advantages of a PPA
- Little to no upfront cost
- Reduced risk: A third party owner is responsible for system monitoring and maintenance
- Lower energy costs: Can save 10-30% off utility electricity prices
One type of organization that would benefit from a PPA is a not-for-profit. Oftentimes, it is difficult for not-for-profits to access or raise the money required for an upfront solar installation. The PPA mechanism easily and immediately allows those organizations to go solar—letting them utilize renewable energy while saving money on their utility bills. Examples of customers well-suited for a PPA are schools, universities, houses of worship and businesses with limited capital.
Advantages of Ownership (Buy)
- Maximize the financial payback of installing a solar system over the life of the system
- Federal and state tax deductions: The federal investment tax credit (ITC) is a credit for 30% of the cost of a solar photovoltaic system that reduces federal income taxes
- Accelerated depreciation (MACRS): With MACRS, the owner of a solar system can expense the solar system’s depreciable value within the first five years of initial investment
While the PPA model is attractive for many customers, it may not be the most prudent method for every company wanting to go solar. The market for commercial solar is booming at the moment due to the federal ITC, and for-profit businesses are capitalizing on the attractive tax breaks. Many companies are also recognizing the long-term savings from owning a solar project. Depending on location and usage, the typical payback period is 4-5 years, after which the company benefits from fuel-free electricity for 20 or more years. While the PPA option allows a customer to put little to no money down and immediately save on their electricity bill, companies that buy commercial systems often can sell renewable energy credits for the electricity produced in exchange for a steady revenue stream. The upfront expenditure for a solar installation, with the discounts from federal and state tax incentives, is an investment that provides a rapid payback in addition to clean, renewable energy.
If your company is interested in evaluating solar, EnterSolar can provide a tailored analysis based on your portfolio, energy usage and available incentives. EnterSolar is agnostic to project finance structures and provides a turnkey solar solution for commercial and corporate entities. We offer flexible financing and help our clients find the optimal pathway to solar. To learn more about which solar options are available for your company, contact us here or give us a call at 888-225-0270.