How to Get the Most Benefit From a Solar Power Purchase Agreement (PPA)

By: Beth A. Fox
– Building Operating Management

This article originally appeared in the July 2017 issue of Building Operating Management magazine: http://www.facilitiesnet.com/green/article/How-To-Get-The-Most-Benefit-From-a-Solar-Power-Purchase-Agreement-PPA--17282

Solar rooftop installations are growing by leaps and bounds. Indeed, according to Market Watch, the fastest growing job in the country from 2012 to 2016 was “solar photovoltaic installer.” Building owners and facility managers across the United States are exploring ways to install solar systems that effectively use rooftop space and save on energy bills.
 
A property owner or manager who is considering leasing or purchasing a rooftop solar system should be aware of the types of arrangements available and how to choose the right company. It is also important to understand pricing issues and be acquainted with contractual provisions unique to these types of arrangements.
 
Types of solar arrangements
 

There are generally three types of rooftop solar arrangements that may be available to building owners:
 

  1. Solar Power Purchase Agreement (PPA)/solar lease, which is the focus of this article.
  2. Purchase of a solar rooftop system. 
  3. A roof lease, where a building owner leases its roof to a solar developer without taking the power.
The last of these, the roof lease, is generally available only to owners of larger buildings, like shopping malls, larger office buildings, or airport hangars. Under this arrangement, the solar company simply leases the roof space from the property owner without providing it with any power from the system. The solar company sells the power to another offtaker, usually the utility in whose territory the property is located, and pays the property owner either a set monthly rent, a portion of the proceeds it garners from selling the power, or some combination of the two. A solar roof lease may be appropriate for a business that would like to profit from some otherwise-unused space and does not need the solar facility as a source of power.
 
Most building owners are interested in using a solar system as a means of reducing the costs of electricity, however, so for most the primary decision point will be whether to purchase or lease a solar system. There are good reasons to purchase, rather than lease, a system. First, while purchasing a solar system usually involves paying steep up-front costs, once the initial system has been purchased it can provide solar power at very little cost over the life of the panels. Additionally, the owner of the system is presently allowed to recover federal investment tax credits on its investment and, if a business, may be able to treat the solar panel system as a depreciable asset. There may also be state tax credits or funds available. For these reasons, despite the initial outlay, purchasing a solar system is generally cheaper than leasing. Second, under certain circumstances, it may be more difficult to sell a building that is encumbered by a solar lease. Having said that, it is usually possible to terminate a solar lease — albeit by incurring a substantial termination payment — or, if the lease has an option to purchase, exercise the option.
 
The main advantage of leasing is that it will usually involve no up front payments, enabling a building owner to enjoy a reduction in its monthly electricity bills without the substantial investment made by those who decide to buy. It is also a lower maintenance option for the owner: Because the solar company is profiting from the energy it sells to the building, it has every incentive to keep the system in good repair and ensure that it operates at maximum efficiency for the duration of the lease. Additionally, where a building owner chooses to lease a solar system, the solar company is responsible for obtaining any needed permits and coordinating the interconnection with the electric utility.
 
Before making the all-important choice of leasing versus owning, it is important to do the math. Understand the cost of purchasing the system, including the interest and other costs associated with taking out a loan to pay for it (if financing is required) and the costs of maintaining it (including additional insurance costs), reduced by available tax credits and other incentives. Then calculate the reduction in electricity bills that the system will generate to determine how soon the system will pay for itself. Likewise, calculate the amount saved on electricity over the term by leasing and attempt to value the ability to avoid the responsibility of repairs or maintenance of the system. Both ownership and leasing of solar systems have value: You need to determine which is right for you.
 
Choosing the right company

Once a property owner decides to go solar, the first step is to choose the right solar company. Before signing with a company that will provide your building with solar power, obtain quotes from several different providers. Cost, of course, is an important consideration, but should not be the only (or even the driving) factor. Even more important is the company’s experience in building similar systems and its technical expertise. Be sure to ask whether the company has developed projects of the same size and configuration that will be needed for your property.
 
It is also critical to understand the solar company’s permitting experience. While a solar company may have experience permitting projects in different areas of your state, it is preferable that it have experience with the specific electric utility that services your building. That kind of experience can make the interconnection and permitting process move more quickly.

Any reputable solar company should be able to provide you with references from prior and existing customers. Be sure to check them, and do your own interviews with any other customers you may know. When speaking with those customers ask, among other things, how the company handled any setbacks in the process, or dealt with any errors. As this will be a long-term relationship, you want to know up front how the company addresses mistakes.
 
Also important is the quality of the solar panels and other equipment that will be installed. This is a key consideration, as you want the system to provide the greatest output for as long as possible. Finally, before signing any agreement, be sure to check how long the company has been in business, its ability to finance the project, and its completion record on similar projects.
 
To negotiate a fair price for the power that you will be receiving, you need to understand the full price you are presently paying. All power customers pay for energy usage (measured in kWh), but the prices charged for this energy likely differ based on time of day (on-peak or off-peak) and time of year (high season and low season). Larger buildings with greater electric usage also pay demand charges (measured in kW) for the point of greatest demand (again, these charges can differ between on- and off-peak and high and low seasons). By contrast, the solar company will likely charge the building a flat per kWh price for power from the solar project.
 
To determine whether the solar project’s pricing is fair, a building owner or facility manager should review at least one full year of electricity bills (two or three years would be ideal) and determine the effect of taking the output from the solar system on both the energy and demand charges. Given the output profile of solar generation, the system should allow the building to obtain significant savings on the higher-priced on-peak charges and potentially avoid or reduce an on-peak demand charge.
 
Building owners and facility managers should also become familiar with the concept of net metering, whereby for every kWh of solar electricity a building feeds into the grid, the owner gets a bill credit for one kWh of utility-generated electricity. Different states have different net metering programs. For net metering programs that require customers to be on time-of-use  rates, excess power generated and sold by a solar system early in the morning (an off-peak time) will be compensated at a lower rate than energy used at, say, 7:00 PM, an on-peak time. But some net metering programs do not require a building to take power under a time-of-use tariff; in these cases, when the solar system overproduces and sends power to the grid, the owner receives power back at the same cost later in the day, when the sun has gone down.
 
Depending on the program, solar owners may still need to pay various charges, known as “non-bypassable charges,” that support grid maintenance and other programs.
 
In any event, a property owner planning to lease, rather than buy, should ensure that its PPA allows the owner to sell excess power back to the utility and keep the proceeds from that sale.
 
Contract issues
 
As noted, in a leasing situation, the parties will enter into a solar lease, whereby the solar company leases the rooftop space on which it will install the solar system, and a PPA, whereby the owner promises to buy, and the solar company to sell, all power from the installed solar system. There are a wide range of issues to consider in negotiating a PPA and solar lease. Although each project is different, some important issues to consider are:
  • Term and extensions. While a 20-year term is typical, many companies will allow an owner to extend the term for anywhere between two and ten years. Ideally, the PPA and solar lease will give the property owner the option to extend the term at its election.
  • Performance and timing. The PPA and solar lease should contain deadlines for construction of the solar facility and the ability for the owner to terminate if those deadlines are not met. Likewise, the property owner should ensure that the PPA and solar lease require the solar company to keep the system in good repair throughout the term, and properly insure the system in the case of damage.
  • Termination. The PPA and solar lease should provide sound provisions that will allow an owner to terminate if the solar company is not meeting its obligations. If the solar company is performing, however, the PPA and solar lease will usually not allow a property owner to terminate the arrangement without paying a termination fee and compensating the solar company for removal of the system.
  • Credits and excess power. Where renewable credits are available, the owner of the system (the solar company) will generally own the renewable credits generated by the system. The system owner will also be able to take advantage of investment tax credits and any state program funding. The parties should agree which of them will own and net meter the excess power created by the system.
  • Panel degradation/performance guarantees. Although solar panels have improved in quality in recent years, they still experience degradation. Generally, panels degrade at the rate of about 0.5 percent per year, with thin film solar panels degrading faster. Make sure that the PPA contains a warranty on the panels, or a performance guarantee from the solar company, at the level of at least 75 to 80 percent over 20 years. Without this guarantee, the system may not deliver the amount of electricity expected after several years of operation.
  • Buyout option. Ideally, the solar lease/PPA will contain an option for the owner to buy the solar system after a certain point in the term. (Due to tax and other implications, the solar company will often require that the option only be exercised after a certain number of years). This is an important provision that, if exercised, could enable a property owner to obtain power for years into the future.
  • Special concerns for landlords. If the solar system will be providing power to areas used by residential or commercial tenants, the owner or manager may also consider alternate pricing arrangements, where the common owners are charged a different rate than tenant occupied areas. Regardless of the rates charged, however, the owner may need to retain an electric billing servicer that allocates electricity among the units and bills and collects from tenants for the energy provided.

Solar systems can provide lower cost, clean energy to a wide range of properties. Partnering with the right solar company under a fair contract can provide great benefits to property owners.