Google, Amazon, and Apple — these tech leaders were all early adopters of what is now a well-established way of procuring renewable energy directly from the source: a power purchase agreement, or PPA.
A PPA is a long-term contract between a power producer and a customer, allowing the customer to secure a supply of clean, affordable energy during the tenor of the contract period (typically 10-20 years). Signing a PPA ensures a given project gets built — be it a wind or solar farm — while also helping the customer hedge its electricity cost in a volatile power market.
But did you know that you can also sign PPAs for onsite solar installations? In this setup, the solar installation is located on your company’s own site, including on roofs, carports, the ground and even near-site areas. You consume the power behind the meter, but a third party designs, develops, constructs and finances the project.
For many businesses this is an easy way of enjoying all the benefits of onsite solar, while not having to invest the time or money and at the same time reducing the associated risks. Instead of waiting 10 years or more for the investment to pay back, a PPA saves money from day one. The PPA provider only gets paid when the solar installation produces energy, so these shared incentives ensure minimizing the time to market and maximizing the production from the assets for the lifetime of the installation.
We get lots of questions about how onsite solar PPAs work, and Pascal Olin, Alight’s Head of Onsite Solar, has lots of answers. Here are some answers to the most frequently asked ones.
What is included in an onsite PPA?
In brief, the onsite PPA should include everything that is needed to design, construct, finance and operate the solar system for the whole contract period. This includes:
How do I pay for my onsite PPA?
Just like an offsite PPA, in an onsite PPA, the customer pays per kilowatt-hour (kWh) produced by the solar installation, while at the same time reducing the amount of electricity that is bought from the grid and thereby offsetting commodity and non-commodity costs. This rate is typically fixed for the length of the contract and is usually lower than the market rate for electricity today.
It’s most common to have a fixed rate with or without consumer price indexation, which adjusts based on inflation. However, in actuality, there are no limits to the alternatives here.
Do I have to buy all the electricity?
The offtake volume is the amount of electricity that the customer agrees to purchase from the solar installation. The solar PPA provider should design a solar installation that is optimal for the customer given its specific needs and site feasibility. In many cases, all the available space can be used for the solar installation without creating excess capacity. It’s therefore most common to commit to purchasing 100% of the produced power, often called 100% pay-as-produced. This also provides the lowest PPA price.
How long is the contract?
The contract length is the period of time that the customer commits to purchase electricity from the solar installation. This is typically between 10 and 20 years, though there are shorter alternatives. Typically, the longer the contract, the lower the price, since the provider has more time to recoup its investment.
How should you determine your contract length? It generally depends on your requirements and business case. You might find that your company is hesitant to sign such a lengthy contract, but there are usually options to exit at any time. Or if you lease your building, for example, you may want to match your lease period with the contract length.
At the end of the day, regardless of contract length, the solar installations will generate financial and sustainability value for more than 20 years.
What if I want to exit the agreement earlier?
Understanding the exit options available in the contract is critical, especially when it comes to gaining internal buy-in. Most contracts allow the customer to exit the contract at any time, but this often comes with an agreed-upon purchase price that you pay to buy the installation. Other contract options may allow the customer to transfer the contract to a third party, for example, a new tenant, but this will typically require approval from the power provider.
What happens after the PPA ends?
After the contract comes to an end, there are generally three options for the customer:
How does battery storage fit into a PPA setup?
Most onsite solar installations can be retrofitted to include battery storage at a later time. Adding storage to a solar solution is a great addition as it adds value across several dimensions. The quickly changing economics around storage, self-consumption and grid service revenue streams, and decreasing battery costs already makes the business case attractive in some markets. Power providers should be able to provide a financial analysis for a customer’s specific site to determine what makes the most sense.
How does an onsite PPA affect my insurance?
Before signing a PPA, make sure that the solar installation will be properly insured. The solar provider is typically responsible for making sure that the solar installation is adequately covered in the event of damage or loss. However, your insurer may have specific requirements that have to be met regarding the design or when carrying out the installation, and your PPA provider should be able to provide solutions for this.
We lease our buildings. Can we still do onsite PPAs?
Luckily you can, however, if your property is leased, you’ll need to obtain permission from the landlord before installing onsite solar. The solar provider may also require the landlord to sign a parallel agreement, giving them permission to use the roof or adjacent land. In addition, the landlord may have specific requirements that have to be met regarding the design or when carrying out the installation, and your PPA provider should be able to suggest solutions for this. If you end your lease contract before the end of the PPA contract, different options exist to end or transfer the PPA.
Can you do onsite PPAs everywhere in Europe?
Yes, but in some European countries like Spain and Poland, companies are not allowed to buy power through a PPA solution at their own site. However, there are alternative contractual setups available that can mirror PPA benefits and terms without classifying it as a PPA. An operational lease is one such setup, which is used in Poland. Your PPA provider should be able to suggest alternative contract structures if PPAs are not allowed.
In both a PPA and an operational lease the installation is owned and maintained by the supplier. However, with an operational lease, the customer pays a fixed monthly price, whereas with a PPA, the customer pays per kilowatt hour produced. It’s common to have production guarantees in an operational lease to shift operational risk to the supplier.
Onsite solar is a partnership that benefits not only the customer and the power provider, but society as a whole. Installing more renewable energy, whether it’s consumed behind the grid or not, drives forward the clean energy transition and helps countries meet their net-zero goals.
Interested in learning more about onsite solar PPAs? Read up on how Kingspan made onsite solar a cornerstone of its energy strategy, or reach out to our team directly at sales@alight-energy.com.
