Power Purchase Agreements (PPAs) are a financing option for projects that generate power in which a third party owns, develops and finances the projects installation, recovering their costs through the sale of project output (renewable energy) to the host (site owner). Little or no capital outlay is needed to install the panels. Using this funding option, property owners avoid the upfront cost of the solar installation while being able to take advantage of the benefits of clean energy and lower energy costs. The third party is able to offer the energy at lower rates based on their receipt of tax benefits to reduce the overall cost of the system. One potential risk with PPAs lies in the embedded assumptions of the agreement. Generally, the price paid is tied to present and future electricity prices that are assumed to escalate at a fixed rate. Historically, electricity rates have increased by an average of between 2 to 4 percent per year. Some PPAs assume that future rate increases will be as much as 6 percent per year. If this assumed rate increase exceeds actual future rate increases, the costs of the PPA may exceed actual electricity costs in future years. PPAs should contain a provision that the electricity rate paid for the PPA should never exceed the blended rate of the utility for the proceeding year. Although uncommon, another PPA risk is that the system is oversized and the site owner is responsible for purchasing production that exceeds their consumption. With appropriate oversight of contract terms and project scoping, PPAs are often a very reasonable and attractive financing solution for solar projects.
Posted on: Tue, 27 Jan 2015 09:33:56 +0000
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