The Benefits of a Power Purchase Agreement vs a Capex System
Solar power is now one of the cheapest electricity sources, and some photovoltaic systems are now producing electricity at a lower cost than coal power plants. Solar panels also have the advantage of adapting to all project scales, from small residential installations to large commercial and industrial systems. However, a key decision before going solar is how to pay for the system: purchasing a solar power system directly, or signing a Power Purchase Agreement?
The Benefits of a PPA vs Buying Solar Panels
A solar Power Purchase Agreement or PPA is very similar to renting commercial spaces or equipment. Instead of paying for the full price of the asset, the user pays a monthly fee. However, there is an important difference between a normal lease contract and a PPA:
- When renting property or equipment, the monthly fee is a fixed payment.
- When signing a solar PPA, on the other hand, the payment is based on the amount of electricity delivered by the installation each month.
Since there is no upfront cost in a PPA, companies can go solar without affecting their cash flow. The capital that would have been spent on solar panels and other system components can be used for business operations or other investments. Also, the kilowatt-hour price in a solar PPA is set lower than the local electricity tariff. This means there are net savings from the first month, and the payback period is instant.
A PPA also makes the provider responsible for operation and maintenance, while companies who purchase solar systems must assume responsibility for these tasks. The solar companies who offer PPAs are subject matter experts, and they have a qualified staff to provide maintenance. On the other hand, companies who purchase solar panels must train their own staff in-house.
To summarize, a solar PPA offers three main benefits:
- Going solar at zero upfront cost
- Immediate savings, no payback period
- Delegating operation and maintenance to solar power experts
Saving the Upfront Cost of Solar Power with a PPA
Australia has some of the highest electricity costs in the world, and solar power systems are much more affordable than in North America and Europe. However, a solar array represents a major investment in a large commercial or industrial building. For systems of this scale in Australia, you can expect to pay around $1,000 per kilowatt of installed capacity. This means a 500-kW system would have an estimated cost of $500,000.
Even if a company can afford a solar power system upfront, that capital has an opportunity cost. With a solar PPA, the capital that would have been used on the project is freed for other investments. The following are some examples:
- Funding business operations directly.
- Expanding a commercial building to accommodate new tenants.
- Expanding an assembly line to increase production capacity.
- Investing in energy efficiency measures to complement solar power.
How a Solar PPA Improves Cash Flow for Companies
Power bills are an unpredictable expense, since electricity tariffs are constantly changing. However, kilowatt-hour prices normally increase each year, and Australia has some of the highest tariffs in the world.
Due to the abundance of sunshine and the high electricity costs in Australia, the payback period of solar power is typically 3 to 5 years. This is just a small fraction of the typical service life of solar power systems: photovoltaic panels from quality brands last over 25 years, while inverters are normally rated for 10 years. However, signing a solar PPA reduces the payback period to zero, while still offering long-term savings.
A solar PPA brings immediate savings, since the kWh price in the contract is lower than the local electric tariff. As a result, companies experience an immediate reduction of their total electricity costs. Even if a company still relies partially on the local grid, the average price of each kilowatt-hour is reduced thanks to the PPA. Just like the capital saved upfront with a solar PPA, the monthly savings can be used to cover other operating expenses, or they can be reinvested.
Delegating Maintenance to the Solar PPA Provider
Solar power systems are characterized by having simpler maintenance needs than other generation technologies. However, this does not mean a solar array can operate continuously with zero maintenance. The following tasks are necessary to keep a solar system in optimal condition:
- Cleaning the surface of solar panels: Accumulated dust and dirt reduce their power output, by blocking part of the sunlight received.
- Replacing inverters after 10 years: As mentioned above, inverters last less than solar panels, even when using quality brands. An inverter replacement must be scheduled and budgeted to keep the system operational.
- Warranty claims and component replacements: No product is perfect, and factory defects can be expected when dealing with large numbers of solar panels. The leading manufacturers offer solid warranties to cover replacements, but this involves filing the warranty claim and installing the new panels.
Companies who own their solar power systems must assume these responsibilities, either with their own staff or by hiring contractors. However, all these maintenance tasks are covered by the provider in a solar PPA. The kilowatt-hour price in a PPA contract includes the cost of all maintenance activities.
A solar PPA is also a simpler option from a management standpoint. There is no need to train an internal staff for maintenance, and there is no need to negotiate with additional contractors. Operating a solar array can represent a challenge for companies who lack experience with the technology, but a PPA makes the provider responsible for the solar array.
A Power Purchase Agreement (PPA) is a great option for businesses considering solar power. There is no upfront cost, and net savings are achieved from the first month of operation. A solar PPA also delegates maintenance tasks to the system provider, and the client company can focus on their core business.
A solar PPA also specifies how electricity will be charged for the entire term of the contract, and there are no surprises. On the other hand, companies have no way to predict how local electricity tariffs will change over time. Signing a PPA is a great business decision