California Center for Sustainable Energy

PPAs and leases can eliminate up-front costs

When considering solar energy for your business, what you really want is the power, so why shell out for the system? That’s the basic scheme of financial agreements known as power purchase agreements and solar leases that cover up-front equipment and installation costs while the customer pays only a monthly amount.

Does this sound too good to be true? Well, it isn’t, but the process is rather complicated and contracts become very complex, according to Matt Lugar, vice president of sales at Stellar Energy in Rohnert Park, Calif. Lugar outlined the primary types of financial structures available for solar and the impacts of the 2008-09 financial crisis on the marketplace during a CCSE workshop held in May.

Basically, there are three choices for commercial solar financing: capital purchase, power purchase agreement ( PPA) and leasing. A capital purchase, using your own cash or a loan, means you own, operate and maintain the solar power system and look to recoup costs from savings on utility costs over several years.

PPAs and leases, while similar in that both involve a third party who pays for and owns the system, differ in how the system host pays for the electricity generated. With a PPA, you purchase the kilowatt hours you use monthly at a pre-set rate that incrementally increases over the term of the agreement. With a lease, you pay a fixed monthly fee, not tied to actual use, sort of like a car lease with unlimited mileage, and you are responsible for system performance, operations and maintenance.

“PPAs and leases make operational power costs predictable,” Lugar said. “The advantage to investors is that they have the long-term security of a system that will produce revenue from electricity generated for more than 20 years, while the customer gets affordable electricity, typically below the retail electricity rate, for the life of the contract.”

Although PPAs have been in use to finance large commercial power projects since the 1950s, only after 2000 were financial packages offered for smaller renewable energy systems as U.S. banks and venture capitalists became increasingly attracted to the money-making potential. They could see a strong solar market developing as California and other states initiated incentive programs and as consumers gained interest in going solar as rising fossil fuel prices boosted utility bills. PPAs quickly became the standard for commercial and industrial solar project financing.

By 2007, competition among solar PPA financers was fierce, but many projects could not be fulfilled as there was both a shortage of solar photovoltaic ( PV) panels worldwide and a lack of know-how among start-up PPA providers. A year later, as PV production was increasing to meet demand, the global financial crisis sent solar project investments into a tailspin, bringing many proposed projects to a halt and creating a tightening of financial markets.

“While the global financial crisis turned off the flow of investment capital for a year or so, today the financial marketplace is softening and opening again for financing of commercial solar PV systems,” Lugar said.

Among the barriers to PPAs and leases is that they are very complex, incorporating legal obligations, procedures and technical requirements that are well beyond the ability of the average building owner or facility manager to understand, requiring a consulting engineer and legal counsel. An alternative is hiring a solar integrator, a company that can handle financing details and system installation from design to commissioning. PPAs and leases also mean host customers give up tax deductions, cash incentives, utility rebates and, if available, renewable energy credits that typically go to the system owners.

PPAs and leases have their pluses and minuses, but when the money is not available for a capital investment in solar power, they can turn visions of cleaner power into reality.

Continue reading June's newsletter.