Finding a Quality Power Purchase Agreement (PPA) or Operating Lease Provider

by Energy Action | Mar 09, 2016
From our previous article, ‘Solar power for commercial and industrial companies’, your first question is probably – how do I find a quality Power Purchase Agreement (PPA) or Operating Lease?

PPAs and Operating Leases for solar offerings are mushrooming across the Australian financial markets. It is crucially important to understand that a PPA is a highly complex arrangement. It can include a physical project with a 25 year lifespan, a commercial property as well as a performance criteria subject to the vagaries of the weather.

A PPA converts a fixed price for an investment in solar into a variable value payable over time, based on an agreed price and a volume of output over the life of the investment. A considerable benefit of a PPA then is to transfer the risk for the volume of output to the party that can best manage that risk - the specialist provider of the PPA. Typically, it's expected that a well sized solar array on a rooftop of a commercial premises will meet about 20% of a sites energy demands, while exporting only about 3% of the energy produced to the grid.

We would always recommend seeking advice from an independent expert (like Energy Action) before you get started. You’ll also often see PPA or Operating Lease information enclosed with a solar installation quote. What do you do with it? Where do you go from here?

Below is a beginner’s guide as to what you need to do next.

What do I look for in a PPA offered by my energy retailer?

Obtaining transparency when seeking to secure a PPA can be difficult. This is a particular issue if the PPA is being offered is from the same organisation that sets the price for power that is bought from the grid. A PPA from your energy retailer reduces the opportunity for a buyer to obtain cost control over both the actual PPA costs and the balance of grid costs over the term of the PPA agreement. This means that a PPA from your energy retailer has the potential to reduce buyer power in the contract procurement process for the long term.

As the retailer of electricity to your site from the grid, your energy retailer has an incentive on both sides of a solar performance guarantee. Fundamentally, the retailer of a bundled PPA and energy contract has an upside if the system under performs and an upside if the output is under quoted and the system over performs.    

Additionally, given that a PPA is likely to be for a 10 year plus term, it is important to consider what energy contract lock-ins might be stated or implied over the course of the Operating Lease or PPA.

Does it make sense to seek out an independent provider of a PPA or Operating Lease?

Independent providers of PPA’s, with clout and quality offerings, are definitely out there. SunEdison*, entered the Australian market in 2015 and are supported by the Clean Energy Finance Corporation and its own multi-billion dollar balance sheet.

SunEdison have built their presence in Australia* around their experience in supporting power purchase agreements for solar installations across the United States.

Will the provider still be around over the term of the contract?
It is perhaps an exciting prospect that the writer of the PPA in front of you right now is writing business below cost. Perhaps they will not be here in a few years to collect on their debt. The likelihood is however that somewhere there is well secured debt to another party that you will take a liability for. Selecting a Provider that you are confident will be around for the long haul is the first criteria for a successful PPA / Operating Lease agreement.

What do I need to do when accepting a PPA?

In theory, a PPA should be a simple contracting exercise - electricity is produced on site from an asset that someone else owns, and a service contract is required to ensure that payment for a volume delivered at a price agreed over the term of the contract. Case closed? Not so.

A PPA is a long term commitment that needs to consider all sorts of eventualities. The vendor is providing an asset with a fixed (and sometimes considerable) value and stumping up the capital expenditure for this. They are obviously very interested in ensuring that they can obtain a return on this asset over its life, hence the contract will consider credit standing, payment default, sale of property, continued access, early termination, dispute resolution, system performance under specific conditions, as well as the usual raft of liabilities, indemnities, and intellectual property protections.

In short, the most important thing to look out for  in a PPA is that your  provider is willing  to communicate exactly what they are offering and be able to itemise the process, inclusions, benefits and costs savings to your business 

Back to the issue of engaging your energy retailer for a PPA, the crux of our concern is that an energy contract will run for 12 months to about 3 years in current market conditions, whereas a PPA will run for more than 7 years.

Get it wrong and your organisation will be locking into a long term arrangement with an energy retailer for an unknown energy price for more than 80% of its energy purchases for a site.

Get it right, and you’ll likely see savings from day one.

In our next Solar Power Purchase Agreement (PPA) education instalment, “Risks and Considerations of Solar Power Purchase Agreements”, we will address some of the key risks and supply a checklist of things to watch out for. Use this checklist to aide your due diligence process ahead of signing on to a long term commitment of a PPA. If you’re in the process now and can’t wait or have more questions about Solar Power Purchase Agreements, give us a call and speak to a consultant – 1300 553 551

*Declaration:

Energy Action is Australia’s leading energy management technology and services company. We provide solutions to the financial and environmental challenges that our clients face. We draw on the skills of our highly proficient, knowledgeable and experienced team of experts and established supplier and industry relationships. Our Projects & Advisory Services team offers multi-discipline engineering and commercial solutions to real business problems.

As part of this team’s offering, we install large scale solar arrays, and also assist our clients to identify best fit solutions to manage the costs of their investments. We are an active proponent of PPA’s and Operating Leases for SunEdison. 

We are on the front foot with market changes to ensure we are providing the best energy management solutions to save your business time and money.

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