Risks and considerations of solar Power Purchase Agreements

by Energy Action | May 20, 2016
With the take up of solar power at residential and now commercial premises across the country (and the expected decrease in the price of battery storage technologies), licenced electricity retailers are arming themselves to ensure that the next wave of power substitution does not pass them by.

The next wave of ‘take up’ has well and truly declared itself. Power which is produced and stored on sites from solar PV arrays (with battery storage) has been hailed as a force to supplement or even entirely replace power sourced from the national electricity grid.

The background behind all this, is that over time, local and global economic cycles drove fluctuations in the demand for electricity. The electricity markets responded by investing in generation assets to produce energy at the right time, to match the consumption of the market – and with the rise and fall of generation technologies.

The last few months have seen announcements from electricity retailers declaring their alliances with battery storage technology providers. There has also been considerable activity in the energy financing space, as retailers assemble supply chains and think through the propositions that will see them take the lead in this new market. 

While this may seem like a ‘shiny new toy’ for your business, before accepting such an offer from a retailer, there are a few risks for your company to be aware of.

Power Purchase Agreement (PPA) and Operating Leases are reasonably complex agreements. They do come with risks that require careful consideration. The information below outlines some of the risks, questions you need to ask and that you should consider within your organisation – in the process of entering into a PPA or an Operating Lease for a solar array.

How does a PPA transfer value?

> A PPA is a service agreement that converts a fixed price for an investment in solar into a variable value payable over time, based on an agreed price and actual volume of output over the life of the investment;

> The key 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;

> A positive outcome can be delivered where PPA provider has a lower cost of capital than the client that obtains the benefit of the solar power: hence the total cost of the PPA over time is lower than the upfront cost to client (factoring in their cost of capital); 

The moving parts in a PPA that define the transfer of financial value from the grid to your site: 

PPA Financial value to site

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