Power Purchase Agreements Unmasked

Power purchase agreements (PPAs) are another third-party financing option that has helped solar. Basically, a power purchase agreement is a contract to buy the electricity produced #Synonyms. Typically, there is no money down and it’ll be less than what you’re paying your utility. PPAs are how most big energy is financed. A power plant is built, and the investors determine how much it will cost them to produce electricity over the next 10 or 20 years.  It trickled into the consumer market because of large scale solar adoption by corporations.  This is how large companies have gone solar because there’s no capital investment and little risk.

Big Companies Like It

Insert Broken Record: “Solar is a financially smart decision.” You’re able to control and predict your costs of your energy for the next 20-30 years. Companies like this for the obvious reason  – rate inflation ( rate deflation is possible but more likely ‘in your dreams’).  Electricity represents a rising cost that lowers their profit margins.

Companies choose PPAs because they make sense in the right condition.

Cannot Afford to Purchase

If you cannot front the cost of a solar system, you should weigh every financing option. There are a lot of options out there including PPA’s, loans, equity lines of credit, PACE financing, and leasing.  Some savvy consumers will look at the cost of the life of the system and choose financing from that.

They Don’t Need a Tax Break

Really? I’m jealous. Even if you can’t use all of your tax credits from solar in the first year, the credits roll over to the next year as well. If you still don’t want tax credits, you should look into a lease and a PPA, oh, and I’d like the name of your accountant!

They Want Someone Else to Own It

This can be for a whole host of reasons.  If the company can’t use the tax credits, then they’ll need someone else who can use them to take ownership. They may not want to add value to their assets for tax, insurance, or some other reason.  The other reason might be maintenance.  Solar does not have moving parts, so the maintenance required is minimal. If you go with reputable companies, you don’t have anything to worry about. Companies have workmanship warranties to cover when equipment is most likely to malfunction. Equipment failure after that is sparse.  But, if you have hundreds of thousands of solar modules on your roof, percentages don’t work in your favor. The assurance that the occasional repair will be covered by someone else is nice, but it comes with a cost.

Companies choose PPAs because they need to show their shareholders they are building a more profitable business. A PPA increases the profit margins in the short-run without a capital cost or debt. In the long-run, Walmart will not save nearly as much money as they could’ve buying solar.

There Are Better Options

As long as you can afford it, I would not recommend a PPA and even then, there’s probably another option out there. Personally, I just don’t like the idea of saving XX percent over the life of the system versus getting FREE POWER after the payback. Many PPA’s have an annual or regular cost adjustment.  Usually these are done in relation to current retail electricity prices or a pre-determined multiplier.  This means you don’t get the full “benefit” of rate inflation.

Over the last four decades, electricity prices have risen 6.5% per year. Edison recently announced 8% increases for its residential customers.  By the way,  when’s the last time rates went down?

A PPA also doesn’t avoid interest rates.  A PPA is another way to pay a loan with less risk for you, which means a higher return for the investor.  The investor is banking on the fact that a certain number of people will default, he’ll have to repair a few systems, and that he’s going to make his money back with interest.  And then comes your savings.  If anyone is telling you a PPA price before looking at your house, they’ve built a lot of cushion into that price. They don’t know how much it’ll cost to install it yet.

However, you can actually take control of your electric bill with AMECO Solar.