Make Sure Your Solar Power Purchase Agreement Is Profitable

03/01/2018 | By Chris Olson

Solar Power Purchase Agreements (SPPAs) are thorny to navigate. But managing the details will ensure that you get the maximum benefits from a solar installation on your roof or land -- including economy, sustainability and locked-in electricity prices. 

In an SPPA, a solar developer owns, operates and maintains the photovoltaic (PV) system. The building or landowner agrees to host the system on its facility or property and to purchase the system's electric output from the developer for a predetermined period. This financial arrangement allows the host customer to receive stable, and often low-cost, electricity. The developer receives financial benefits, such as renewable energy tax credits and income generated from the sale of electricity.

Benefits and Challenges of SPPAs

BENEFITS

  • No upfront capital costs
  • Predictable energy prices
  • No system performance or operating risk
  • Projects can be cash flow positive from the start
  • Visible demonstration of environmental commitment

CHALLENGES

  • More complex negotiations and possibly higher transaction costs than buying a PV system outright
  • Administrative cost of paying two electric bills if PV system does not meet 100% of building’s demand
  • Potential increase in property taxes if property value is reassessed due to improvements made to accommodate the PV system
  • The site lease may limit the building owner’s ability to make changes to the property if they affect the PV system or access to it

SAMPLE PPA SAVINGS SUMMARY

  Year 1 Year 10 Year 20
  kWh Production 625,000 596,875 565,625
  Avoided Utility Cost ($/kWh)  $             0.130  $                0.170  $                0.228
  Annual Utility Savings  $          81,250  $          101,242  $          128,937
  PPA Rate ($kWh)  $             0.120  $                0.157  $                0.210
  Annual PPA Cost  $          75,000  $             93,454  $          119,019
  Annual Net Savings  $             6,250  $                7,788  $                9,918
  Cumulative Net Savings  $             6,250  $             69,950  $          159,142

 

 

 

 

 

Source: Eric A. Woodroof and Albert Thumann, How to Finance Energy Management Projects
This example assumes a utility savings of $0.13/kWh and a utility inflation rate of 3%/year.   
Nationally, utility rates have averaged 5% annual increases over the past 40 years. 
The kWh production declines over time as the PV system ages.

A contractor is the third party in an SPPA. The contractor does the engineering, procurement and installation on behalf of the developer and may also maintain the system over a term of up to 25 years. The building owner does not assume any risks in the system’s construction and operation, unlike if the owner purchases the PV system and undertakes responsibility for construction and installation. In the SPPA model, the owner buys the power produced by the PV system rather than the PV system itself.

This arrangement allows an owner to hurdle some traditional barriers to on-site solar systems, including high upfront capital costs, system performance risk and complex design and permitting processes. The deal can be cashflow positive for the building owner from the day the system is commissioned.

However, the savings depend heavily on the availability of federal, state, local government and/or utility incentives – and these can vary dramatically by area and time.

“The incentives can make or break the potential for a viable PPA,” says Eric Woodroof, an energy consultant, Certified Energy Manager (CRM) and Chairman of the Board for the Certified Carbon Reduction Manager. If your building is in an area with current incentives, your developer needs to seize them quickly. If not, Woodroof suggests that you consult with solar energy experts to learn whether new programs are expected.

Every PV installation under an SPPA will have a different solution, whether it be a ground mount or a roof mount on a building or parking structure. In general, the lower the price of the project, the less electricity is produced. High-efficiency PV modules and sun-tracking systems cost more and produce more kWh. Designers create a solution for your facility based on technical, performance and financial inputs.  

Be Aware of Construction and Operational Issues

Even though the developer and contractor are responsible for the construction and operation of a PV system, the FM and building owner still need to coordinate with them on both. FMs should know the building access required by the contractor during construction as well as roof access, roof warranties, safety, and building and fire codes. Maintenance, including regular cleaning, will require access to the PV system over its service life.  

Owners should take a long view of an SPPA. “Any solar project is a sizeable structure that will occupy your roof or land for 20 or more years,” Woodroof adds. 

Chris Olson is a contributing editor for BUILDINGS.


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