Funding Solar - Power Purchase Agreement

November 5, 2020

Why choose solar?

For most businesses in the UK, powering their facilities via solar power – if physically possible – is something that they would very much like to do.

The idea of generating clean, renewable, energy, onsite ticks many boxes; from enhancing their CSR credentials to reducing their reliance on fossil fuels, solar power has very few downsides.

Indeed, earlier this month the International Energy Agency (IEA) said of solar power, ‘in most countries it is now consistently cheaper to generate electricity by capturing the sun’s energy rather than by burning coal or natural gas

How PPAs can help you

Whilst solar panels do provide cheaper power, the downside is there is usually significant upfront cost in order to access this cheaper power.
 
Thankfully, there are several ways for businesses to harness the power of the sun without putting unnecessary pressure on their cashflow or balance sheet; the most popular of which, and the subject of this blog, is Power Purchase Agreements or PPAs.

A PPA sees the solar array funded, operated and maintained by a third-party who has access to significant funds from institutional investors. The third-party will have unrivalled experience in developing high-quality solar arrays that deliver maximum benefit for both the host business and the investors.

Once the system is operational, the host business does not pay for the solar array but they agree to buy the solar energy from the panels on their roof at a cheaper rate than the power they buy from their traditional supplier. This arrangement sees the host business realise immediate savings from the solar system as they have no capital to recover.

The third-party remains responsible for the operation and maintenance of the array for the life of the system – usually 25 years.
 
At the end of the PPA terms – which can run from 10 to 25 years – the ownership of the array, and therefore the full benefit of the system, passes to the host business.

Why PPA might not be the route for you?

Whilst the benefits of PPA far outweigh the disadvantages, it is important to consider why PPA might not be right for you.
 
The main drawback is that the solar panels become a ‘tenant’ of the host business. In practical terms nothing will change other than providing right of access to the panels but it does mean that if you do not own your site you will need a minimum of 10 years remaining on your lease and permission from the owner to enter into the PPA.

Additionally, if you do own your site, and have plans to sell the building within the PPA term, you will need be satisfied that the next owner of the building will not develop the site or remove the solar array from the roof. If this is part of their plans you will need to factor in the cost of purchasing the system from the investor in the asking price for your site.

In Summary

PPAs offer the following benefits –
 
  • No capital cost
  • Immediate savings
  • True carbon reduction
  • Operation and maintenance costs by others
PPAs have the following drawbacks –
 
  • Must have a minimum of 10 years remaining on a lease if the site is not owned
  • If the site is owned you must be confident that the site will not be redeveloped inside the PPA term.

For more information please contact one of the team.