A power purchase agreement (PPA) is a contract between two parties, usually a power producer and a buyer. The agreement stipulates that the buyer will purchase energy from the producer at a fixed price over a certain period of time. PPAs can be advantageous for both parties, but there are also some drawbacks to consider before entering into one. Let’s take a closer look at the benefits and drawbacks of PPAs.
About power purchase agreements
Power purchase agreements, or PPAs, are a type of financing in which a third-party entity owns your solar system. Your company pays for the solar power at a discounted rate, typically 15-20% below the rate charged by utilities such as Eversource or National Grid. Power purchase agreements typically span 10 to 25 years. At the end of the contract, you can choose to buy out the owner, extend the contract, or have the system removed. Power purchase agreements are a great way to finance commercial solar panels with little upfront cost. Contact us today to learn more about how Power Purchase Agreements can benefit your business.
The benefits
A Power Purchase Agreement (PPA) is a contract between an electricity generator and a utility company or other entity that wants to buy electricity. The key feature of the PPA is that it provides price certainty for the electricity over the term of the contract, typically 10–20 years. This means that the buyer knows how much they will pay for the electricity over that time period. It allow them to budget better and avoid price shocks. PPAs can be used for any type of generation. However, these are most commonly used for renewable energy, such as solar or wind. One of the main benefits of PPAs is that they can help to finance new generation projects. This is because the developer can sell the power at a fixed price over the life of the contract. This can help to attract investment and lower the cost of financing.
Another benefit is that they can help to provide stability to the electricity system by providing a source of long-term demand. Moreover, they can help the environment.
PPAs can help the environment in two ways. First, they provide a stable market for renewable energy, which encourages developers to build more projects. Second, they help to finance these projects by locking in long-term revenue. This makes it easier for developers to get loans and attract investors. Because of this, PPAs can help speed up the move to a low-carbon economy in a big way.
Read here: Top 5 Home Energy Considerations for Solar vs. Wind
The Disadvantages
The major disadvantage is that you are not eligible for state or federal subsidies. The third-party owner owns the system and consequently receives all of the advantages under a PPA. The system will lower your monthly power rates, but you will not benefit from tax breaks or SMART payments. As a result, while a PPA may save your company money, it will save you far less than if you paid cash or obtained another sort of loan.
By switching to solar power through a Power Purchase Agreement (PPA), you’ll also help the environment by using fewer fossil fuels. However, there are some drawbacks to consider before entering into a PPA. One major disadvantage is that you are not eligible for state or federal subsidies. Since the third-party owner owns the system, they receive all the advantages, including tax breaks and SMART payments. While a PPA may save your company money, it will save you less compared to paying cash or obtaining another form of loan.
Additionally, entering into a long-term contract like a PPA means committing to purchasing energy at a fixed price for a specific period of time. While this provides price certainty, it also means that you may miss out on potential cost savings if energy prices decrease in the future. It’s important to carefully analyze market trends and consider the long-term implications before committing to a PPA.
Furthermore, exiting a PPA before the contract ends can be challenging and may incur significant penalties. If your energy needs change or if you decide to explore alternative energy options, you may face difficulties in terminating the agreement or transferring it to another party.
Despite these drawbacks, PPAs can still be a viable option for businesses looking to finance renewable energy projects without a large upfront investment. They provide price stability, help attract investment, and contribute to the growth of the renewable energy sector. It’s crucial to carefully evaluate the terms and conditions of a PPA and consider your specific business needs and goals before making a decision.
In conclusion, power purchase agreements offer several benefits, including price certainty, financing opportunities, and environmental advantages. However, they also come with drawbacks such as limited access to subsidies and potential challenges in contract termination. It’s important for businesses to weigh these pros and cons and conduct thorough due diligence before entering into a PPA.
