Power Purchase Agreement 101
What is a Power Purchase Agreement?
A power purchase agreement (PPA) means that your nonprofit buys only the solar electricity generated by the solar system installed by a third party at at your facility. Your nonprofit does not buy any equipment; it’s a contract to supply solar electricity at a known price for the long term.
Does it make sense?
Under the terms of a solar PPA, a third party owns, operates, and maintains the solar system and sells 100% of the solar electricity generated to your nonprofit at a locked price for a term of up to 25 years. The federal tax incentives available to businesses – the investment tax credit (ITC) and accelerated depreciation – can offset 50% or more of the installed cost of a solar system. The PPA provider can then pass a portion of the savings on to to your nonprofit in the form of a lower PPA cost of electricity.
Is it cost effective?
The third-party ownership model can be a cost-effective arrangement for nonprofit organizations interested in pursuing solar but lacking access to the necessary funding, or prefer to forego ownership for other reasons. Additionally, buyout options can be negotiated into the contract for the host to purchase the system sometime after 6 years and up through the end of the PPA term at the solar system’s fair market value.
Free solar installation
A free solar installation is included with a PPA. In exchange, you buy the solar electricity generated saving money from day one.
Advantages of third-party ownership:
1. Benefit from Federal Investment Tax Credit (ITC)
Your nonprofit can benefit from the 30% ITC. By lowering the cost of the project to the solar developer and its investors, a lower solar electricity price can be offered to the nonprofit.
2. Benefit from accelerated depreciation.
Solar installations can be depreciated over a 5-year period rather than over the expected useful life, which is much longer. The impact of depreciation usually is greater losses for the investors, which then are used to offset other taxable gains. Like the ITC, the host benefits from accelerated depreciation in that it could allow for a lower price per kilowatt-hour of electricity in the PPA.
3. No up-front capital investments for your nonprofit.
Although installed costs are declining, the required initial investment to install a PV system is still significant, even after rebates. The cost of a 1MWp solar system on a middle school, for example, can exceed $2,500,000. Using the third-party PPA model, it is the solar developer and investors that finance and own the system, thus eliminating the need for the school district to invest its own capital into the project.
4. Locked electricity prices for 20+ years.
Power purchase agreements are structured with a locked price per kilowatt-hour of electricity that is adjusted annually with a pre-determined inflation rate, also known as escalator, for the length of the contract. The kWh price is most likely competitive with the utility rates that a school is currently paying.
5. Operation & maintenance responsibility handled by system owner.
The system owner operates and maintains the solar system, removing this burden from the school district. This includes replacing the system’s inverters should they fail after the standard 10-year warranty but prior to the end of the PPA term.
6. Buyout option provides ownership potential.
Often PPAs are structured so that the school district has the option to buy the system at various points during the life of the PPA. The first option to buy the system takes place sometime after year 6, because changing ownership before then causes significant tax penalties. The buyout price is typically calculated as the greater of fair market value of the solar system or the discounted cashflow of the remaining payments in the PPA term.
7. Risk avoidance.
The risk of electricity production is borne by the PPA provider. The school district only is obligated to purchase what the system produces. Additionally, the PPA provider commonly guarantees a certain level of minimum production of electricity, compensating the school district for any shortfall.
This is one of several options. There isn’t a one size fits all; you actually have different options in going solar. We would like to help you determine which one is right for you.
Here are your options:
Ownership: cash
No differently than any other major home improvement like putting in a deck or a home remodel, you can buy the solar system with cash and let the solar system generate free electricity for the rest of your nonprofit’s life.
Ownership: finance
Similar to a cash purchase, you own the solar system and once it’s paid for, it will continue to generate electricity.
Leasing, or PPA
In the past we didn’t recommend leasing until we put this program in place. This is the best program in the country. We install a solar system on your nonprofit with zero out-of-pocket expense. You can make a small monthly payment that is less than the utility payment.
Doing nothing
Continuing with the status quo is your most expensive option. Pick any of the other 3 options and you will save money. Electric rates have gone through the roof (pun intended) over the last 25 years. If more regulation is imposed on utilities and the grid is outdated, guess who will pay for that? You.
The government pays 30% of the cost
These are real dollars. Basically, as long as you pay federal income taxes, the federal government pays for 30% of the cost of the system.
Federal Tax Credit, or ITC
The credit is equal to 30% of expenditures, with no maximum. Eligible solar energy property includes equipment that uses solar energy to generate electricity.
Use it against alternative minimum tax
The Solar Tax Credit gives you the ability to take the credit against the alternative minimum tax. There is no credit limit for solar-electric systems.
What qualifies for the credit?
The federal tax credit was established by The Energy Policy Act of 2005. The federal tax credit for residential energy property applies to solar-electric systems, solar water heating systems, fuel cells, small wind-energy systems and geothermal heat pumps.
Carry the credit forward
If the federal tax credit exceeds your tax liability, the excess amount may be carried forward to the succeeding taxable year. The excess credit may be carried forward until 2016.
Paying $200+/month for electricity?
With power cost continuing to climb, it might be a good time to consider solar. Your nonprofit’s air conditioning system runs for most of the year, and the bill is never any fun to get.
Can solar lower that electric bill though?
No need to suffer
You can slash your bill without sacrificing your air conditioning and suffering through the hot summer months.
The government pays 30% cost
A home solar power system offers you free, clean, renewable energy. Plus, you may qualify to have the government pay you $20,000 or more to install a medium-size residential solar power system.
A real example
A family of five living in a 3,200 square foot home with 3 refrigerators, 3 computers, a 220V well and lots of landscape irrigation just received a PG&E bill for only $4.61.
Solar is going mainstream
This dream is a reality for many families who have invested in their homes by installing a residential solar power system.
How quickly can you see the savings?
You can see savings from day one. Once we design, pull the permits, install the equipment and turn on the system, your meter can start to spin backwards. Whether you lease or buy it, from day one, the monthly investment on the system is less than what you are paying your local utility. In other words, you are ahead of the game.
Should I own a solar system?
Ownership is always good! Once you own the solar system, the electricity generated is free for the next 25 years.
Freedom to choose your solar panels
When you buy, you choose what solar panel and inverter to use unlike when you go with a lease.
Your nonprofit owns the equipment
You can buy it with cash or finance it. We have multiple options.
25-year factory warranty
The output of the panels is guaranteed by the manufacturer for 25 years.
Your nonprofit receives all the incentives
As owner, your nonprofit will receive the 30% tax credit and any other incentive available to you.
MYTH: Cost is too high and payback too long
Most people have a misconception that solar energy is too expensive and the payback is too long. This is not currently the case. Solar system costs are at historical lows and electric rates are at historical highs. THERE IS NO BETTER TIME TO GO SOLAR THAN NOW. The industry is installing more systems than ever before, because the numbers make sense.
Should I do a solar PPA?
With a PPA, your solar installation cost is free and the leasing company owns the equipment. They maintain it and give you a production guarantee. In exchange, you will make monthly payments for the term of the PPA. Your savings are more than your PPA payment.
When you finance with a PPA:
The solar panels are chosen by the leasing company
The leasing company owns the equipment and therefore choses the equipment
The leasing company owns the equipment until you pay it off
We have multiple options for your current financial situation.
Production warranty
The output of the system is guaranteed by the leasing company.
Leasing company received the tax benefits
As equipment owners, they will receive the 30% tax credit and any other incentives available to you.
Considering going solar? let’s talk.
Our specialists can help you navigate all the options for your unique circumstances.