Federal Long-Term Power Purchase Agreements (PPA)
What is a power purchase agreement?
One of the most influential developments in solar energy project
financing in recent years has been the
use of retail and wholesale power purchase agreements (PPAs) by
solar companies. A power purchase
agreement is a contract wherein a property owner contracts with a
solar integrator/ developer to install
solar technology on a given property (roof or ground‐mounted). In
order to avoid the up‐front cost of
solar—often the largest barrier to installation—the equipment is
installed at no cost to the property
owner. In turn, the owner agrees to purchase electricity from the
solar integrator for an extended fixed‐term period (usually 20
years) for a fixed price. Because a
PPA guarantees a set revenue
stream over the life of the project, it makes deploying small and
large‐scale solar installations across the U.S. economically
feasible. Approximately 80% of all the photovoltaic (PV)
installations in 2008 relied on the PPA financing innovation.
Under the terms of a PPA, the solar integrator assumes the risks and
responsibilities of ownership,
including purchases of equipment, operation, and
maintenance. Because of the duration of the power
purchase agreement, the cost of the solar electricity offered
through a PPA is less than the cost of
existing electricity from the incumbent local electricity service
provider. Consumers of the solar
electric power find the arrangement appealing because they assume no
financial, technology, ownership, operation and maintenance or other
risks throughout the term of the contract; yet they obtain less
expensive power that is non‐polluting and locally produced.
The PPA model is currently used in the private sector and on a
pilot‐project basis at a handful of military installations – a 14 MW solar
installation at Nellis Air Force Base structured as a 25 year PPA is saving
the base over $1 million/year. Providing the entire federal government with
20‐year PPA authority will both increase the use of solar and save the
federal government money.
Problem with federal law
Current federal law limits the length of federal power purchase agreements
to 10‐years. Unfortunately, projects are not financially viable under this
truncated timeline because it takes approximately 10 years for the solar
integrator to fully amortize their investment. The second ten‐year period
is when the project generates net income to the developer.
More