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Power Purchase Agreements (PPAs)
Key to any business project is the financial pros and cons; whether the project will be a net positive or negative for the business. Purchasing a solar energy system is no different; you must weigh the financial costs and benefits of the venture.
A PPA's primary benefit is that it doesn't need capital outlay. Your business will benefit from energy savings without risking its available capital.
Solar electricity generation is a sustainable, cheap and reliable power source. When you decide to go solar, you will need to weigh your options; here's what you can expect.
You will find several financial options to fund your solar energy project within the solar industry. Although they may vary according to the service provider, there are essentially three types of finance options you may come across.
If you have the cash, you can buy an entire solar energy system in a single payment.
A solar energy system is an asset that can last for decades, so buying one in cash will go on your balance sheet. It's a straightforward transaction where you will have complete ownership of and responsibility for the solar energy system.
The main advantage of buying cash is that you will have purchased your future energy needs today, so you won't have to worry about inflation. The major downside of a cash purchase is that the customer and service provider often overlook the maintenance costs over the solar system's lifetime. So you may find yourself stranded when the system needs repairs, replacement, or checkups, which can become prohibitively expensive in the long run.
A bank or solar energy provider may finance a loan purchase. The customer only has to pay a deposit and periodic payments.
A loan purchase provides the same benefits as a cash purchase with the added advantage of being easier on a business’ cash flow. It also comes with the same disadvantages of a cash purchase, along with having a negative effect on your credit rating and potentially losing assets the business lists as security.
Power Purchase Agreement (PPA)
A PPA is an agreement between a solar service provider and the customer. The solar service provider will install the solar energy system on the customer's property, and the customer will only pay for the electricity they use from the system.
You don't pay for the solar module, the panel mounting, the monitoring system, or maintenance. You pay a predetermined electricity rate that is up to 30 per cent cheaper than standard rates. The solar energy system belongs to the solar service provider, not the customer. So it doesn't reflect on your balance sheet.
What is a Power Purchase Agreement?
A PPA is a contract to sell the power a solar service provider (electricity generator) produces to the customer (off-taker). The solar service provider will own, install, and maintain the solar energy system on the customer's property.
The solar service provider will be responsible for all the costs of purchasing, installing, and maintaining the entire system. The customer will only pay for the electricity they use from the solar energy system at a predetermined tariff.
Key features of a Power Purchase Agreement
As a contract, a PPA will set the commercial terms for selling and purchasing solar-generated electricity between the parties. A PPA will have the following basic features:
- The commencement date of the relationship between the solar service provider and your business. It will also have an implementation schedule that includes project assessment, administrative procedures, and system installation.
- The length or term of the contract.
- The rate that you can expect to pay for the electricity you use. The pricing will include any rate increases you may expect in the future.
- The terms for invoicing and payment.
- Estimation of the power your business needs and how much the solar service provider will produce.
- The sale and transfer of any green benefits such as tax breaks or renewable energy credits (RECs).
- Connection to the grid, if applicable.
- Maintenance and repair responsibilities you can expect from the solar service provider.
- Force majeure exceptions (actual and potential transmission constraints and interruptions).
- Arbitration and dispute resolution procedures that both parties will follow.
- How you can extend the contract terms if you wish.
- Buy-out options and early termination rights.
Who owns the solar energy equipment in a PPA?
The PPA relationship is unique in that the customer doesn't own the solar energy system, but they reap the full benefits of the electricity it generates. The solar service provider will purchase, possess, and maintain the solar panels, batteries, inverters, and performance monitoring systems. The customer will only pay for the electricity that it consumes, and at a rate that can be 50% cheaper than the market.
That means your business gets green, cheap electricity without having to worry about buying equipment or maintaining it.
How does my business benefit from a PPA?
A solar PPA is an efficient and effective green energy source. When your business chooses to use a solar PPA solution, you will:
- get cleaner, low tariff energy with no capital outlay.
- have the solar service company provide complete maintenance, repair, and replacement costs of the entire solar energy system.
- hedge your business from the risk of fluctuating energy prices. Rather than having to buy your energy at market rates (which rely on variables like supply and demand forces, reservoir levels, reserve power, charges etc.), you will have a predetermined rate that is constant.
- have energy costs that will also not be subject to inflationary pressures. With a constant, predictable energy rate, your business will be making savings for decades.
- reach your sustainability goals quickly with solar energy and add tangible results to your corporate responsibility endeavours. Solar PPAs come with Renewable Energy Certificates (RECs) or Guarantee of Origin (GOO), which add to your green credentials.
- make money for your business. Energy is key to your operations, but it isn't what makes your business money; products and services do. If you don't have to spend capital on energy, you can focus on revenue-generating expenditures like expanding your facilities, buying new equipment, or hiring more staff.
Why is PPA a better solar financing option?
PPA is suitable for large-scale projects that need to reduce their electricity costs over the long term.
Buying a solar solution in cash for a large project can easily run into millions of Rands. That's money out of your coffers before you even get a kilowatt of power.
Solar loan agreements may be easier on your bank account, but they have a direct impact on your credit rating. So any finance you need after the solar project will come at higher interest or principal, meaning you won't be able to take on larger projects easily later on. To secure the loan, you will also need to use assets as security and potentially meet restrictive financial terms.
Something that businesses and some solar service providers underestimate is the long-term costs of maintenance and repairs. Consumers want to spend as little money as possible, and providers want their solution to seem cost-effective. Once the sale is complete, the customer may be stuck with a maintenance and repair bill that increases every year. The cost centres that are easy to overlook on a solar project include:
- solar system monitoring costs. Somewhere down the line, the solar panels may struggle to produce the installed power, and you will need to know it immediately. The monitoring system will provide analysis 24/7 and alerts should there be an issue. So you will need to install the monitoring system and pay for the internet bandwidth it will use to send data.
- maintenance costs. Solar panels are robust and long-lasting. Nonetheless, maintenance work will be necessary from time to time. The cost of the skills, equipment, and work hours will likely fall on your shoulders.
- repair and replacement costs. Debris may fall on solar panels and damage them, or there could be a factory defect affecting the efficiency of the solar model; whatever the reason you may find yourself needing to fix the issue. The monetary impact isn't easy to plan for, but it will occur and drain your finances.
- solar panel cleaning costs. If there isn't any rain, the solar panels will collect dust and other material that can hinder the panel's efficiency in absorbing the sun's radiation. A cleaning service can add to your expenditure during those rainless months.
- call out fee. Each time you have an issue, the service provider will charge you for every site visit.
- access to rooftop costs. If the solar panels are on a hard-to-reach rooftop, you will have to facilitate transporting technicians and equipment. You will need a cherry picker, platform crane, or cat ladder which can cost tens of thousands of Rands to hire or install.
- insurance costs. Insurance can handle some of the above expenses, but it will come at the expense of monthly premiums. You will also have to fork out money for the excess or any amount that isn't covered.
What can my business expect from a PPA service provider?
With PPA, you only pay for the solar electricity you use, not a penny more.
- The solar service provider will monitor the system on your premises at their expense.
- Should there be a fault, breakage, or malfunction of any kind, the solar service provider will take care of it.
Your part in the deal is to use and pay for the electricity that the solar system generates. The solar service provider will take care of the rest. Since the solar provider only gets paid from the solar electricity that your business uses, it's in their best interest to keep the solar system working efficiently.
Why choose SolarAfrica?
A solar energy system is a sophisticated project. You don't want a fly-by-night or mafikizolo company handling a project that will be responsible for your power for the next few decades.
Partner with a company that has a track record of service delivery.
SolarAfrica takes the time to understand your energy usage and build a system that will suit your unique needs. A system that is too big will be a waste, and a system that is too small will not give you the power you need.
The products and services at SolarAfrica come with guarantees. A guarantee is only as good as the company that issues it; we at SolarAfrica have been around for years and will be here in the future to meet your guarantees.
Here at SolarAfrica, we value the solution over a sale. We will give you a solution that will have the impact you need, we don’t compromise the quality of our work.