Power Purchase Agreement

A Solar Power Purchase Agreement (SPPA) is a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its property and purchases the system’s electric output from the solar services provider for a predetermined period. This financial arrangement allows the host customer to receive stable and often low-cost electricity, while the solar services provider or another party acquires valuable financial benefits, such as tax credits and income generated from the sale of electricity.

With this business model, the host customer buys the services produced by the PV system rather than the PV system itself. This framework is referred to as the “solar services” model, and the developers who offer SPPAs are known as solar services providers. SPPA arrangements enable the host customer to avoid many of the traditional barriers to the installation of on-site solar systems: high upfront capital costs, system performance risk, and complex design and permitting processes. In addition, SPPA arrangements can be cash flow positive for the host customer from the day the system is commissioned.

  The solar services provider functions as the project coordinator, arranging the financing, design, permitting, and construction of the system. The solar services provider purchases the solar panels for the project from a PV manufacturer, who provides warranties for system equipment.

The installer will design the system, specify the appropriate system components, and may perform the follow-up maintenance over the life of the PV system. To install the system, the solar services provider might use an in-house team of installers or have a contractual relationship with an independent installer. Once the SPPA contract is signed, a typical installation can usually be completed in three to six months.

An investor provides equity financing and receives the federal and state tax benefits for which the system is eligible. Under certain circumstances, the investor and the solar services provider may together form a special purpose entity for the project to function as the legal entity that receives and distributes to the investor payments from tax benefits and the sale of the system’s output.

The utility serving the host customer provides an interconnection from the PV system to the grid, and continues its electric service with the host customer to cover the periods during which the system is producing less than the site’s electric demand. Certain states have net metering requirements in place that provide a method of crediting customers who produce electricity on-site in excess of their own electricity consumption. In most states, the utility will credit excess electricity generated from the PV system, although the compensation varies significantly depending on state polices.

 

Benefits & Challenges of SPPAs
Benefits for host customer Challenges for host customer
  • No upfront capital cost.
  • Predictable energy pricing.
  • No system performance or operating risk.
  • Projects can be cash flow positive from day one.
  • Visibly demonstrable environmental commitment.
  • Potential to make claims about being solar powered (if associated RECs are retained).
  • Potential reduction in carbon footprint (if associated RECs are retained).
  • Potential increase in property value.
  • Support for local economy and job creation.
  • More complex negotiations and potentially higher transaction costs than buying PV system outright.
  • Administrative cost of paying two separate electricity bills if system does not meet 100 percent of site’s electric load.
  • Potential increase in property taxes if property value is reassessed.
  • Site lease may limit ability to make changes to property that would affect PV system performance or access to the system.
  • Understand tradeoffs related to REC ownership/sale.