Solar Power Purchase Agreement (SPPA) refers to a financial contract between a solar power system owner and a host customer. The owner operates, maintains the photovoltaic (PV) system. The host customer usually owns the property where the owner sites the system, but may also have a long-term lease. In return for the free worry-free installation of the equipment, the host customer agrees to purchase 100 percent of the electricity generated from the system.
Often, the solar system’s owner consists of tax investors operating under the umbrella of a limited liability corporation (LLC). The LLC has the financial support from one of more lenders. This entity receives a steady income stream from electricity sales, as well as a variety of other financial benefits. Along with assessing, designing, engineering, and installing the solar electric plant, the firm also secures the regulatory certification, incentives, and rebates.
Some companies function solely as solar project developers and have zero state in ownership. Developers arrange deals and receive a fee for its services. The developer acts as intermediary between the system owner and the host customer throughout the process. However, some firms function in both roles - developer and system owner.
The SPPA Business Model
This business model, called the “solar services provider” model, started gathering steam several years ago when companies started offering “no-money down” solar systems to homeowners. Traditionally, a major barrier to residential property owners and many small businesses when it came to installing solar power systems relates to the high up-front capital costs necessary for equipment and labor. In addition, purchasing a solar power system presents performance risks and other concerns, such as complex design issues and maneuvering the permitting process.
With an SPPA, the host customer does not have to make a cash outlay to purchase the system, which may be installed on the rooftop or sited elsewhere on the grounds. In return, the customer agrees to buy the power from the system owner for a specified price over a predetermined duration. Most agreements last from 10 to 20 years.
Sometimes, a SPPA can immediately put the host customer in a positive cash flow scenario from the day the system comes online – depending on the output. One disadvantage of the model, by not owning the equipment, is that the customer does not qualify to receive any of the tax credits or rebates offered by utility companies or the government.
SPPAs differ from leasing a solar power system because the customer with a lease must operate, clean, maintain and manage the system. Some leasing agreements require the customer to have the system connected to the utility grid. In addition, the customer must pay a fixed monthly cost regardless of the amount of electricity generated by the system
SPPA Pricing Structure
SPPAs have two common pricing schemes: fixed price and fixed escalator. The fixed price scenario sells electricity to the host residential, business or government agency at a set price for the length of the contract. In the early period of the agreement, the possibility exists for the SPPA price to exceed the rates charged by the utility company. Nonetheless, utility price hikes escalate over time and eventually surpass the SPPA fixed price and a positive savings for the host.
Fixed escalator price scheme entails the electricity generated by the system sold to the host at a price that increases at a specified rate, such as 1 to 5 percent for ten years. The agreement may call for a fixed rate for the remainder of the contract. This method recovers cost for reduced efficiency as the system ages, inflation, operations, maintenance, and increases in utility pricing.
A solar power purchase agreement pricing model uses less often bases the price on the utility company's rate combined with a specified discount. This scheme ensures the PPA price remains below the utility's rate, but requires more complex structuring because it negates the advantage of price predictability typically offered by SPPAs.
Another pricing scenario may require the customer to prepay for a percentage of the electricity generated by the system; or, invest in the site's installation to lower the cost of the system. This works effectively for government agencies that have the authority to issue tax-exempt bonds or provide some other method of funding, which lowers the project's cost.
Debt and tax equity investors finance most solar power purchase agreements. To attract the funding necessary, developers offer investors extremely attractive benefits, such as tax credits and depreciation write-offs instead of using them. For example, several months ago Google invested $280 million in SolarCity for funding 10,000 rooftop solar modules installations for residential customers in the United States.
The company will be able to take advantage of the federal government's incentives of 30 percent tax credits for equipment, labor, and other costs associated with the installation of solar systems. In addition, Google will receive the benefits of the five-year modified accelerated cost recovery system (MACRS), which allows a five-year recovery system for commercial photovoltaic systems.
Solar Power Purchase Agreements are relatively new for the residential solar market, having been around since 2007. However, the solar industry has used SPPAs in the commercial and governmental segment of the sector for a longer period. With the cost for a residential unit ranging from $15,000 to $50,000 (US), many solar industry insiders believe SPPAs represent the most cost effective model for residential property owners to receive the benefits of solar power without taking on the risks.