STA Blogs: Power Purchase Agreements (PPAs) – How everyone can win from solar

  • Simon Booth has over 20 years’ experience of developing new business channels and propositions across a diverse range of SME and corporate market sectors including for GE Capital, Chubb & SembCorp Bournemouth Water. He has developed and delivered innovative funding solutions in the UK renewable energy sector since 2012. Today he is the co-founder of Zestec Asset Management Limited which develops, acquires and manages renewable energy assets for institutional and private investors.

Background

Solar PV power is still in comparative infancy compared to conventional energy sources but as we start to witness an increase in the deployment of complementary technologies such as energy storage and electric vehicle charging, adoption in the commercial and industrial (C&I) sector is set to increase at an exponential rate.

Two predominant factors are driving the inexorable march towards renewable sources of power in the C&I sector; energy prices and CSR policies.

For commercial property owners, the opportunities are significant, not only in the short-term to reduce their energy costs but over the longer term to drive creative ways in which they can maximise returns from generating their own electricity. Of course, there is a capital cost to deploying these solar installations and for many businesses, this can prevent them from taking advantage of the opportunities represented by their property. However, there is a way to take advantage of the benefits of a solar installation without deploying capital. This is possible due to the interest of institutional investors in solar as an alternative asset class and the use of a Power Purchase Agreement (PPA).

PPAs

A solar PPA is an agreement in which an investor funds the installation of a solar system at no capital cost to the property owner. This includes working with an experienced developer and asset manager who facilitates the technical design, gains necessary permissions and manages the installation of the solar PV system. All of this is backed by professional institutional investors that provide the capital based on the returns they receive from the electricity generated over the life of the system, which is consumed by the property owner.

Cheaper electricity

Generally, the life of a PPA is around 25 years (although this can vary) and over this period the customer receives a significantly reduced electricity tariff offsetting the costs from their utility provider. Additionally, clients have long-term contracted pricing, which gives them budgeting transparency helping protect against the volatility of the energy market (we have witnessed electricity prices of c.6% in the last few weeks alone).

Operation and maintenance of the system

Solar PV systems are not ‘load and leave’. Installations require an active operations and maintenance programme to ensure they run smoothly, enabling them to generate the forecast electricity generation, returns and savings throughout their lifetime. This inevitably adds a financial burden over and above the capital purchase, not to mention the hassle factor of managing the process. Some businesses simply don’t have the experience or expertise to manage this type of asset, or indeed monitor its ongoing performance.

Other costs

Added to the ongoing costs are the recent increases in business rates for companies with a solar installation. These represent significant multiples on historic rates depending on the system capacity; with a PPA these rates do not apply as the asset is owned by a third-party investor.

Three main reasons why PPAs benefit clients;

  • Immediate reduction in energy costs: Clients receive significant energy savings and solar PPAs also provide a predictable cost of electricity for the term of the agreement, with the price the client pays increasing at an agreed rate.
  • No capital investment: Without any upfront investment, the client can begin saving money as soon as the system becomes operational.
  • No ongoing maintenance burden: The asset manager takes responsibility for system performance and operating risk.

PPAs in a subsidy-free world

As a result of successful global deployment of solar PV during the last decade, we have witnessed solar’s transition from an alternative asset class into a mainstream energy source and a critical component of the energy mix.

This, coupled with the availability of a lower cost of capital, highly professional & experienced providers who are able to de-risk the process from a client and investors perspective and a continued decline in the cost of solar equipment are important factors in enabling organisations to take advantage of PPAs without any reliance on government subsidies.

Integrating battery storage and electric vehicle charging with a commercial roof mounted or carport solar PV system under a PPA is fast becoming a reality and will be mainstream as we move through the remainder of 2018 and into 2019.

Zestec Asset Management

Zestec funds and manages high-quality new energy assets on behalf of its clients and investors through its PPA agreements. Providing a full service through a network of carefully selected partners, we create long-term relationships with our clients to maximise the benefit they receive from their solar PV systems.