Could a Power Purchase Agreement Help You Save Money? A Guide for Solar Users
Turning to solar power can save you significant money in the long term, but one of the largest hurdles to getting started is often the up-front cost of installing a system.
While there are federal tax incentives and financing options available to make solar power systems more affordable, many nonprofits, municipalities, school districts, businesses, and other organizations are also turning to power purchase agreements to fund their solar projects.
These arrangements allow solar customers to partner with a third party, often a developer, who constructs the system at little to no initial cost to solar users and then serves as the system owner, selling the generated energy back to the customer. This mutually beneficial agreement is an alternative to purchasing panels outright.
Could a power purchase agreement be the right choice for you? Here’s a guide to how they work, where they are available, and how to decide whether one is right for your project.
What Is a Power Purchase Agreement (PPA)?
A power purchase agreement (PPA) is an arrangement between a solar customer and a third party in which the two work together to establish a solar system, with shared benefits. Power purchase agreements typically last 15 to 25 years. At the end of that period, the agreement may be extended, may be ended, or the customer may fully buy the system from the developer.
Here’s a look at the responsibilities for each role and the benefits they receive.
Third-Party Developer
Responsibilities
- Covers the cost of constructing the system on the solar customer’s land, generally at no cost to the customer.
- Owns the system, assuming the risk and costs of maintenance.
- Sells the power the system produces to the solar customer, generally at a rate lower than the market rate of electricity.
Benefits
- Receives the benefit of any tax credits or other financial incentives for the system.
- Keeps a stable income source throughout the power purchase agreement.
Solar Customer
Responsibilities
- Purchases the solar energy produced by the system from the developer, resulting in energy cost savings.
- Hosts the solar energy system on their property.
Benefits
- Benefits from having access to solar energy with little to no upfront costs.
- Does not have any maintenance or ownership responsibilities.
- Can purchase the array from the third-party developer starting in year six, or any agreed-upon time after, typically at a discounted price.
What States Allow Power Purchase Agreements?
While power purchase agreements are a common way to fund solar projects, not every state has laws in place that allow them to work. According to the Database of State Incentives for Renewables & Efficiency, at least 29 states allow solar users to enter into third-party power purchase agreements. Some states that allow PPAs place limitations on the size of the system or what sectors can enter into an agreement.
In the Midwest, states that explicitly allow PPAs include Iowa and Illinois.
Some states place restrictions on PPAs, although they may explicitly allow other forms of cost-sharing for solar installation, such as solar leases. Since legislation varies from state to state, it’s best to contact a solar installation company near you about whether a PPA could work for you.
Factors to Consider Before Entering Into a Power Purchase Agreement
There are several factors to consider when deciding whether to use a power purchase agreement versus to own the system yourself. Here’s a look at the benefits and tradeoffs of each choice.
Benefits of Power Purchase Agreements
- PPAs have low to no upfront costs.
- They provide locked-in energy savings over a period of several years.
- There is no responsibility for solar maintenance.
Tradeoffs of Power Purchase Agreements
- Owning a system outright will likely provide greater long-term energy savings.
- PPAs are not available in every state.
PPAs vs. Leasing Solar Panels
Another alternative to a PPA is to lease your solar panels. Both of these arrangements offer the advantages of low upfront costs and lower electricity bills long-term, without the responsibilities that come with owning or maintaining a solar system.
However, one major difference is that leasing solar panels results in a flat cost every month, regardless of your energy usage. Under a PPA, you will be billed a cost based on your energy usage for that month, meaning that your cost reflects month-to-month electric usage fluctuations.
If you’re looking for an arrangement that provides steady monthly payments, a lease could be the best option, while a PPA will be the option that more closely mirrors your usage patterns.
Ready to Explore Your Power Purchase Agreement Options?
Are you interested in learning more about whether a power purchase agreement is right for you? The good news is that you don’t need to navigate all of these factors alone.
At 1 Source Solar, we’ve completed several projects that use PPAs, including a 5,800 solar module project at Northern Iowa Area Community College in Mason City, Iowa. The college plans to purchase the system in the sixth year of the agreement, at a 40% discount. At that time, it will cover 100% of their energy needs.
Our team of solar specialists is dedicated to helping each of our clients determine the most cost-effective and fitting solution to reap the environmental and financial benefits of solar power.
Contact us today to talk more about how to set up a power purchase agreement.