Exploring solar Power Purchase Agreement options? Take a look at the difference between models and learn how they can end up saving or costing you more.
The basic concept of a solar Power Purchase Agreement (PPA) is the same in all cases: the client purchases the electricity output of a photovoltaic system at an attractive price, while the system provider is responsible for financing, operation and maintenance. This deal is attractive for both parties: the client gets low-cost electricity without having to commit capital upfront, and the provider gets a guaranteed stream of income while the PPA lasts.
However, there are many ways in which the PPA business model can be deployed, even if the underlying concept is the same. Depending on the needs and conditions of each client, solar photovoltaic arrays can be deployed behind the meter or in front of the meter.
As you might guess, solar PV systems behind the meter do not involve power retailers and their networks: electricity is supplied directly from the PPA provider to the client, without travelling through power lines owned by a third party.
When commercial solar systems are deployed behind the meter, they are generally installed close to the point of use, most commonly on the building’s rooftop. However, there may be exceptions to this – if a solar PPA client owns a large extension of land, there may be a longer distance between the best site for photovoltaics and the point of use.
In the most common type of commercial solar PPA, the client uses the photovoltaic system to meet their own electricity needs. To make the project financially attractive, the kilowatt-hour price is established below the tariff normally paid by the client. Consider that network costs represent more than half of the power bill for many Australian consumers, providing a significant opportunity to reduce electricity expenses with solar PPAs – a kWh price reduction of 50% is possible in many cases.
When electricity consumers do not own the building they use, deploying a solar PPA is slightly more complex but still possible. With respect to electricity bills, there are two possibilities:
When tenants are billed separately for electricity consumption, solar power can be deployed normally as long as there is authorisation from the landlord. In these cases, a solar PPA is more attractive for tenants who plan to continue leasing their space in the long term.
On the other hand, when tenants are sub-metered and billed by the landlord, it is easier to deploy a solar power system for the entire property. Although the solar savings are subtracted from the main power bill paid by the property owner, a portion can be passed on to tenants. This makes commercial spaces more competitive – the prospect of cheaper electricity is very attractive for tenants, considering the high tariffs in Australia.
These solar power installations use the existing network infrastructure, which means they involve the electric utility company. Like in the previous case, there are two possibilities:
When electricity is purchased by a private consumer, the kilowatt-hour price is agreed between both parties just like in a solar PPA behind the meter. However, a fee must be paid to the network provider for use of their infrastructure. In this case, the network fee can be compared with the shipping you pay when purchasing products online. The main drawback of this agreement is that the network cost cannot be controlled by the parties involved, but at least the client can benefit from a fixed generation cost for the term agreed in the contract.
A solar PPA in front of the meter can be attractive for companies who lack adequate space to deploy a photovoltaic array in their property.
In some cases, solar PPAs are negotiated directly with the power retailer, which is not very different from selling to private businesses. In this case, there is no network fee, since the solar PPA client and the network owner are the same!
Solar PPAs for large-scale generation have broken price records in many parts of the world. Over the past 12 months, solar power projects with prices below 20 US$ per megawatt-hour have been announced in Saudi Arabia, Mexico and Colorado (USA).
There tends to be more flexibility when dealing with solar PPAs behind the meter, since the power network infrastructure is not involved. When dealing with solar PPAs in front of the meter, there are additional costs or rules that change depending on the network provider. Not all power retailers allow energy trade through their network, and not all are willing to purchase electricity through PPAs.
Regardless of the parties involved, there is a common benefit provided by all solar PPAs: the electricity price is agreed for the duration of the contract, protecting the client from price volatility in the energy market. Note that even power retailers can benefit from this, since the electricity obtained through PPAs is not subject to the sudden shifts of spot market prices.
Solar PPAs are a win-win business because they provide stability for the parties involved, in an industry that is notorious for volatility. Getting a fixed kWh price is attractive for both the consumer and the supplier – the consumer is protected from price hikes, while the supplier avoids price drops in the wholesale market.
Take the time to do some detailed research before selecting a solar PPA model, to make sure if suits your requirements.
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