When Solar PPA stands for Pretty Powerful Alternative
“Horses for courses” said my friend when I asked him why he rented an enormous gas guzzler despite his absolute aversion to fossil fuel transportation: “Where I’m going, I need a 4-wheel drive with 300 miles of ranges and the largest ground clearance I can get. I couldn't find an available Mars rover.”
Point made. We can all think of tools and services that are excessively misused (i.e., antibiotic drugs?), but given the right circumstance become the ideal solution. So it is for power purchase agreements (PPA). I’m no fan of PPA’s for homeowners and commercial building owners, for many reasons (see, “Solar PPA for homes — a bad long, long term deal”). Here I drop the other shoe: they’re perfect for the right deal.
Putting aside all the tremendous benefits of purchasing a distributed generation solar power plant for net metering, any entity that does not want to own a power plant, or does not have the balance sheet to purchase a power plant, or does not want the power plant on its books, will want someone else to own it; the principal available vehicles are then lease or PPA. To review, the difference between the two is that in the former, the host rents the power plant, while in a PPA the host buys the yield from the system. It’s vaguely like renting a car by the day vs. renting it by the mile.
From a tax advantage, according to tax pro’s who muse on such things, the two instruments present similar principal advantages: off-book financing while a 3rd party passes through all the tax benefits. Among the lease’s key advantages can be the locked-in buy-out option. Also, a well performing system will yield a lower cost per kW/h because the system cost is flat for the entire term. In a PPA, the cost per kW/h is locked in, and probably with an annual riser.
Given that, a lease is often a better deal than a PPA for the host. However, there are frequent scenarios when leases are not available, and PPA’s offer a great alternative. Let’s look at some of them:
-Privately held corporations that cumulatively use 800 mW or more of AC power per year. Since the radical changes in banking laws, by-laws and operating practices following the crash of ‘08, private companies’ access to capital at reasonable rates has been significantly curtailed. The requirements for obtaining lines of credit and leases are often too onerous or invasive for owners. The ability to secure power from their own facility at a rate competitive with utilities are often exactly the structure they want.
-Government entities. Schools and public service operations, local to federal, are an ideal PPA customer, and they are often large power users. Again, the political process of agreeing to commit to a lease, let alone obtain the lease, is far too cumbersome, even if the investment analysis pointed to greatest historical returns. Often, it’s simply far better to switch a “power utility” model, because that expense is already budgeted.
-Community solar. This is a growing field, increasingly facilitated by utility concessions. When getting a large group of people together with differing property sizes, community focus and socio-political points-of-views, it is challenging to achieve consensus on something like a power plant acquisition, no matter the financing method. Far easier is to simply beat a prevalent cost of energy and guarantee savings.
-Temporary installations and installations on leased real estate. This is a PPA market which has existed for a while, but has operated under the radar because it’s niche. With the advent of racking solutions and other cost reductions in deployment of solar hardware, the time for the 5-year PPA (or even shorter) is knocking at the door. The host savings may be minuscule, perhaps inexistent, but there is a market for it. Part of this is driven by the shift in market perception that solar power is better than utility power, so that at “cost parity” solar may be preferred over the “all grid” solution. It’s an ideal application of the PPA in that you only buy what you need for however long you need it.
In the increasingly sophisticated world of renewable energy financing, the PPA is a menu choice that is not about to go away. What makes it attractive, its categorical simplicity, counters the fact that it can be the most expensive way to secure 20 years of distributed solar generation. That becomes irrelevant in the right scenarios as discussed above. Recently at a seminar on the future of solar in Pasadena, CA, an audience member asked a panelist who is a government affairs expert whether she should go forward with a residential PPA “because she heard it’s a scam, and the salesman is really aggressive.” That’s the problem with using a good tool for the wrong reasons; it gets negatively branded. In a situation with no other choice, the PPA locks in a 20-year discount over utility rates, with the sex appeal of solar. That arrow fills out nicely the solar industry’s quiver.
