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Power Purchase Agreements

What is a PPA?

A Power Purchase Agreement (PPA) refers to a contractual agreement between two parties, typically a power producer and a customer.

The producer usually arranges the design, gains the necessary permissions and manages the installation of a solar PV system on the customer’s property at little to no cost. Whilst under contract, the customer receives a significantly reduced electricity tariff, offsetting the costs from their utility provider, whilst the developer receives income from the sale of the generated electricity.

The PPA characterises the nature of said agreement, such as negotiated prices and the amount of electricity to be supplied. PPA contracts can vary and each contract is adapted to the requirements of both parties. PPA’s are usually longer-term contracts in the range of 10-25 years. Whilst under contract, the developer remains responsible for the operations and maintenance of the system. When the contracts come to an end the customer can choose to remove the system, extend the PPA or purchase the energy system.

How do on-site PPAs with solar PV work?

On-site solar PV generation can take the form of either a large-scale rooftop installation on a commercial or industrial (C&I) site, or a ground-mount installation on adjacent land.

It is also possible for C&I energy consumers to contract directly with a nearby renewable generator via a private wire arrangement, but these arrangements are more complex and remain relatively rare. By their very nature, on-site PPA structures are location and situation specific.

To be successful, most on-site PPAs with solar PVshould meet the following requirements:

  • The consumer’s electricity demand profile must be sufficiently large, consistent, and time-matched for the solar PV generated electricity to be well suited to meeting it – for example, a cold storage facility with stable round-the clock demand, or a manufacturing plant with its highest demand during daylight hours.
  • A suitable physical location (whether ground-mounted or roof-mounted) must be available to host the site on-site or near site. As a rule of thumb, at least 1 square meter of roof space would be required per kW of solar PV capacity, but this will vary considerably depending on the shape and configuration of the roof (angled or flat) and whether it is obstructed by ventilation units or similar. A large-scale ground-mount PV installation will require at least 1.6 hectares (4 acres) per MW.
  • Any on-site electricity generation development of 1 MW or more, whether rooftop or ground-mounted, will almost certainly require planning permission from the relevant local authority in England.
  • An affordable connection to the local distribution grid must available.
  • The consumer must be deemed sufficiently credit-worthy to facilitate the financing of the generator’s assets.

Benefits of PPA’s

PPA’s can produce significant benefits for both parties, including:

Immediate Reduction in Energy Costs: On-site PPAs enable large electricity users to benefit from buying their electricity from a renewable electricity source onsite or near-site, and to avoid both wholesale price volatility and many of the “non-commodity” costs associated with buying electricity through the grid. Solar PPA’s provide a fixed cost for electricity for the duration of the contract and the solar PV asset owner has a guaranteed customer over the long term.

No Capital investments: The energy consumer does not have to pay up-front for the cost of developing the generator themselves. This means that the customer is able to benefit from cost saving from day one of the contract and continue to benefit for the duration of the agreement.

Limited Risk: Under a PPA, customers can benefit from greener energy and implement more sustainable business practices with very little risk. The developers are responsible for the maintenance of the solar panels, so the customer does not have to worry about equipment failure.