The Pros & Cons of Solar PPAs (Power Purchasing Agreements)

A Solar Power Purchase Agreement (PPA) is a financial arrangement that allows you to install solar panels on your property with little or no upfront cost.

In a PPA, a third-party developer owns, operates, and maintains your photovoltaic (PV) system, while you site the system on your roof or elsewhere on your property and purchase the electricity from them - at a significantly lower price than you would pay to your utility provider.

PPA contracts are usually 10-25 years, and include fixed per kilowatt hour pricing, with scheduled increases over the years to account for inflation and the rising costs of operation and maintenance.

Pros of a Solar PPA

No Upfront Costs

The absence of upfront costs is a significant advantage that can't be overstated.

Traditional solar installations come with a hefty price-tag, often running into the hundreds of thousands of dollars.

This high price can be a deal-breaker if you have a limited capital expenditure budget. And even if you do have the budget, an expensive photovoltaic system may simply not make sense from an ROI perspective, particularly as rising interest rates make financing more expensive.

A Solar PPA can eliminate these obstacles. The third-party provider takes on the financial risk of the investment, while you benefit from lower-cost, clean energy.

Immediate Savings

As we mentioned in the previous section, the time it takes to realize a return on a solar investment can be a prohibitive obstacle. 

Since you're not actually purchasing the system in a PPA, there isn't any investment to recoup. You simply benefit from lower electricity prices on day 1. And energy costs through a PPA are usually just one third the cost of traditional electricity, which means the savings are substantial.

More Predictable Energy Costs

With traditional utility services, energy costs can be volatile, subject to market fluctuations and seasonal variations. A Solar PPA contract reduces this volatility by locking in a predetermined per kilowatt hour price (with predictable, scheduled increases) for the duration of the agreement.

Of course, this doesn't make your energy costs completely predictable, because weather variations can reduce the amount of electricity your PV system produces or increase your business' electricity needs beyond your system's capacity - potentially forcing you to purchase electricity from your local utility company. But it does make your costs more predictable than they would be without solar power.

This kind of predictability in energy costs can be a boon for your financial planning, helping you forecast expenses and invest your resources more efficiently.

Hassle-Free Maintenance

Of course, solar arrays require ongoing maintenance, like regular cleaning of solar panels, electrical checks, and occasional part replacements.

With a Solar PPA, the third-party provider takes on this responsibility, so you can focus on your core business activities without worrying about maintenance schedules or technical glitches.

This isn't necessarily a huge advantage, however, as solar systems are relatively low-maintenance.

Cons of a Solar PPA

Long-Term Commitment

One of the biggest drawbacks of a Solar PPA is the long-term contract. These agreements typically last from 10 to 25 years.

While PPA contracts often include options for early termination or buyout, the specifics, such as the timing and cost, can differ widely from contract to contract. Typically, you can only buy out of a PPA after year 7, due to restrictions on federal tax incentives.

Some PPA agreements do have generous buyout provisions between years 7-10 of the contract. These provisions can allow you to own your system for a relatively low cost after your provider has harvested the tax benefits.

Limited Financial Benefits

While a Solar PPA eliminates upfront costs, it also limits how much solar energy saves you.

When you purchase a solar system, you lay claim to all the financial incentives, including federal tax credits, depreciation benefits, and any state and local incentives. These can significantly offset the initial investment needed to buy your own system. In contrast, a PPA sees the third-party owner reaping these financial rewards. 

Scheduled price increases are another factor. In most contracts, your provider can increase your kWH price by 3-5% per year. While the fixed rate does make your energy costs more predictable, it also means that over the term of the PPA, your savings may dwindle as the rate increases.

Purchasing a system outright may require a larger initial outlay, but it stabilizes energy costs in the long term and allows you to reap the full cost savings offered by your PV system.

Not Available To All Businesses

Because utilities are regulated, PPAs are subject to restrictions. 29 states allow customers to establish PPAs with 3rd party providers, while 6 states explicitly disallow them. View an in-depth map here. 

Complexity of Contracts

Solar PPAs can be complex legal documents that require careful scrutiny. They include clauses that dictate the terms of electricity pricing, system maintenance, and performance guarantees. Understanding these terms requires a certain level of expertise and may demand legal consultation, adding to the overall cost and complexity of adopting a Solar PPA. If not negotiated carefully, you could find yourself locked into unfavorable terms for years to come.

Exit Strategy Complications

Exiting a PPA can be complicated and costly. Whether you're looking to buy the system outright or terminate the contract early, these scenarios are often bound by complex terms and conditions. This can include buyout costs calculated on the current market value of the system or penalties for early termination. These complications can make it challenging to change course if you find that the PPA no longer aligns with your organization's objectives.

The Bottom Line

PPAs are a popular way to go solar - and for good reason. At the end of the day we all want to save the planet and our bottom lines with the least investment and hassle, and PPAs are designed to help you do exactly that. 

But PPAs aren't a good fit for everyone; in many cases, the investment calculus supports an investment in a system that you fully operate and own. If you have more in-depth questions about going solar, schedule a free call. In this short, 15-30 minute discussion, one of our experts can provide you with customized guidance.