What Is a Solar Power Purchase Agreement and Why You Should Take a Closer Look

Converting to solar power is growing more attractive to a growing number companies, school districts and farms. In addition to supporting a more sustainable future and America’s energy independence, solar energy often brings lower, more stable pricing to your monthly electricity bills. This is particularly true as America continues to receover from the pandemic’s economic slowdown.

Making the move to solar is not as easy as flipping a switch. Designing, purchasing, and installing solar arrays represents a potentially significant capital expenditure even with tax credits and grants. Cost can become a deal-breaker for some. There is a way to eliminate upfront costs and the associated risks of converting to solar power: Solar Power Purchasing Agreements (SPPA).

An SPPA is a financial arrangement in which a third-party solar developer or investor assumes the cost and the risk of  developing, operating, maintaining, and ultimately owning a photovoltaic solar system on a host customer’s property. This can include farms, businesses, schools, other state or municipal properties. In return, the host customer agrees to purchase the electricity generated by the solar system for an agreed upon period of time. Based on the size of the system and the amount of electricity required by the host customer, the third party solar developer may even lease the land, creating a new revenue stream for the host customer. In return, the solar developer is rewarded by tax credits and income from the sale of the electricity.

Here’s an example, Solential was recently involved in a Solar Power Purchasing Agreement between an electrical co-op and a school district in Indiana. The school district agreed to lease the land to the co-op, committed to purchasing electricity for 40 years, lowered its immediate energy costs, and “inflation proofed” its future. The co-op benefited from an ideal location, a long-term customer and the opportunity to bring solar power to others in the community.

This approach, where one buys the services of the solar system instead of the solar system itself, is called a solar services model. It’s attractive because it removes upfront the barriers to adopting sustainable solar power since no capital expenditure is required. The host customer is not responsible risks related to system performance, the design, permitting and construction process; and ongoing system maintenance. Often, the host customer enjoys a cash positive position from the day the solar system is commissioned. That’s about as easy as flipping a switch don’t you think?

Important Details

As a host customer, you need space for a solar array. The easiest and most cost efficient place to construct a solar array is on open ground. However, roofs and in some cases, parking lot canopies, are other options but involve more cost. Too, not all roofs can accommodate solar panels. Roof-mounts work best on new construction when the roof can be designed to accommodate the weight and ongoing maintenance.

Location is also dictated by the size of the solar system, energy needs of the host customer and requirements of the third party developer/investor. Most will have minimum sizes to ensure commercial viability.

As a host, be prepared to sign a long-term agreement on the land and also on the amount of electricity purchased. If you’re a farmer and discover you’d rather use the acreage for row crops or a new poultry operation, that isn’t going to happen until the lease expires or there’s a (likely huge) buy-out clause. If you’re a municipality with acreage, you won’t be able to take the land back for a new school or senior center either. Hosting a solar system requires a multi-decade commitment.

Hosts also have to take a long-term view on your solar energy usage commitment. The cost of the generated electricity is typically at, or slightly below, the retail electric rate. SPPA rates can be fixed—and is a negotiating point—but can include an annual price increase up to five percent to account for inflation-related cost increases for system operation, monitoring and maintenance; and anticipated increases in the price of grid-delivered electricity. The term length of most SPPAs can range from six years to 25 years or more.

Here’s what a host doesn’t have to worry about: upfront and ongoing costs. The third party solar developer/investor provides equity financing and receives any eligible federal and state tax benefit. The third part developer-investor may also claim associated renewable energy certificates (RECs) generated by the system. This, too, is negotiable.

And Now a Few Challenges

  • If the negotiations are complex or the terms not to your liking, it may be more advantageous to buy a solar system outright.
  • Administrative cost of paying two separate electricity bills if system does not meet 100 percent of site’s electric load.
  • Potential of higher property taxes if property value is reassessed.
  • Possible limits to changes to the property that would affect solar system performance or access.
  • Tradeoffs related to REC ownership/sale.

Solar Power Purchase Agreements are just one way for businesses, farms, schools, municipalities, and hospitals to remove barriers to solar adoption. There are other ways to simplify the process. That’s why it works to your advantage to consult with an experienced solar solutions provider like Solential that can identify and execute the right plan for you and your organization. To schedule a call or Zoom conference, shoot me an email a cmiller@solential.com or call or text 317-627-4530.