Power Purchase Agreements
- Long-term contracts
- Not appropriate for small projects
A Power Purchase Agreement (PPA) is a financing structure that enables property owners or tenants, including state and local governments, to realize the benefits of renewable energy generation without having to own the equipment and pay the upfront capital cost. State and local officials can use PPAs to finance their own projects, as can also help fellow agencies and consumers understand their value and mechanics.
The PPA "buyer" (property owner or tenant) enters into a long-term contract where they agree to pay a predetermined rate for the kilowatt hours delivered from the renewable energy asset. The length of the contract varies depending upon the type of energy improvement, but typically ranges from 10 to 20 years.
The PPA rate is typically fixed or pegged to a floating index that is on par with or below the current electricity rate being charged by the local utility company.
The renewable energy developer utilizes the contract to attract private investors who are comfortable with the customer's ability to make payments over the term of the agreement. This enables investors to realize their target return on investment for providing the initial capital. Individual investors determine the value of specific PPAs based upon criteria ranging from the term, price of energy delivered, creditworthiness of the counterparty, and other contract details. If the energy payments over the life of the contract plus any other incentives produce a desirable return on investment, then investors will provide the upfront capital to finance the project.
The PPA financing structure is most appropriately utilized for a planned major renewable energy installation. In this situation, speed is less critical which presents an opportunity for larger projects and potentially less expensive financing costs. A PPA is a rather complicated structure where coordination amongst all stakeholders and standardized contract language is critical to deploy assets more widely and to attract a diverse set of investors. As a result of these complexities, the PPA model is appropriate for the commercial and MUSH (municipality, university, school, hospital) markets. However, there are also new vendors trying to make PPAs for solar available to the residential market.