Many Envizi clients are considering the role that Solar PV may play in their organization’s energy ecosystem. Part of the decision-making process should consider how the system will be financed. We invited Todae Solar (an Envizi partner), to provide insight into solar financing through Power Purchase Agreements (PPAs)
Author: Landon Kahn, Todae Solar
PPA’s (power purchase agreement) have an extensive history in the US with numerous Fortune 500 companies employing them to reduce their energy costs. PPA’s have existed on a large scale utility level in Australia, but they are a real, viable and attractive option for all businesses both large and small.
A power purchase agreement allows companies to harness the benefits of solar power, without the capital investment or risk. Under a PPA, a solar PV system customized to the organization’s energy use will be installed on the premises at no upfront cost. The energy from the solar system is consumed onsite and the organization is billed according to this consumption.
The benefit from this model is that generally a PPA offers a cheaper rate than current grid prices, and this rate is secured for a fixed term (say 15 years) with indexation to CPI. Effectively an organization can lock in an electricity tariff for 15 years without capital expenditure.
A PPA enables an organization to hedge against future electricity price rises, which is of particular interest to many given the significant electricity price increases over the past four years. PPA’s not only provide a level of insurance against future rises but provide business with a long-term and sustainable method of energy generation.
Whilst PPA’s have been employed on a utility level, in Australia they have not been prevalent in the commercial sector. The Australian market has evolved significantly and many organizations are now adopting PPA’s at similar levels to that experienced in the US. Three significant factors have led to the dramatic increase in the viability of PPA’s in Australia:
- The sharp rises in electricity prices nationally
- The reduction in solar component pricing (by as much as 75% in the last 4 years)
- The solar rebate (while under review) is close to its cap, allowing maximum leverage of the subsidy
These three factors have enabled operators to offer PPA’s at an extremely competitive rate, potentially offering discounts of around 15% on current day electricity tariffs.
As an owner-occupier with sufficient roof space, setting up a PPA is relatively simple, and requires minimal effort. A PPA can be executed in the same amount of time it takes to execute a new electricity supplier agreement.
There are dozens of solar installers and many of these offer PPA’s. As PPA’s are gaining traction in Australia it is important to ensure that the chosen provider has experience and expertise to meet requirements for the long term. When evaluating a PPA option, be sure sufficient due diligence is conducted on the solar operator as well as any third-party financiers involved. Ultimately, it’s important that your PPA is backed by a solar installer/financier that:
- Has a long history of large scale commercial solar installations
- Bankability for warranty and reliability
- Expertise in executing and servicing PPA’s
Remember that PPA’s are only one of the financing options. As the market evolves, innovative financial models emerge. Be sure to ask your solar installer for advice on this topic.