How PPAs Attract Investment in the Solar Industry

3rd Sep 18

Cameron Quin

Written by Cameron Quin

As we have discussed in previous articles, Power Purchase Agreements (PPA) make solar systems more accessible, eliminating the upfront cost for the client. Instead of paying for the solar array itself, the client pays for the electricity delivered each month. The provider is responsible for financing and maintenance in a solar PPA, and all the client must do is agree to purchase electricity for a minimum term established in the contract.

However, PPAs also provide a broader benefit for the solar industry in general: they draw capital towards the industry, by making solar projects more attractive for banks and investors. There are many reasons why investing in solar PPAs is more attractive than simply selling photovoltaic systems, or building solar farms to sell power in the wholesale market.

Solar Power System Are Reliable and Durable

When banks and investors provide capital to purchase or develop of an asset, they tend to prefer constructions and systems that will last a long time. Getting funding for new experimental technologies is difficult precisely for this reason – banks and investors are afraid that the project may fail, causing them to lose capital.

However, photovoltaic systems are no longer an experimental technology, since they have been field-tested in millions of projects around the world. In addition, if the equipment comes from established solar manufacturers, the warranties available are longer than the typical payback period of a photovoltaic array.

  • Solar modules typically have a 10-year warranty against manufacturing defects, and a 25-year warranty for energy output.
  • Complementary components such as inverters and batteries are also available with a 10-year service life.

In addition to using equipment with a long service life and solid warranties, photovoltaic arrays have very simple maintenance needs compared with other energy generation systems. When investors see a project that last long while demanding little attention, they are more likely to provide capital – consider that their money becomes the project, and equipment failures not covered by warranties are equivalent to losing money.

The durability of solar systems is a positive attribute from the investment standpoint, but another factor is necessary for an attractive business case: solar developers must find a way to maximise the financial returns from a photovoltaic system. There are many ways to make money from photovoltaic technology, but their profit margins differ.

Why Investors Like the Solar PPA Business Model

If solar systems are serviced properly, they have the same durability regardless of how their electricity output is used: self-consumption, sold privately to a third party, or sold to established power retailers in the wholesale market. However, selling privately to a third party through a solar PPA provides the most attractive business case for developers:

 

  • Selling and installing commercial solar systems can be a lucrative business, but the system provides no additional income for the provider once it is operational. There may be eventual maintenance services, but there is no guaranteed revenue after the sale.
  • Developing solar farms to sell power in the wholesale market provides a constant income, and the project can benefit from economies of scale. However, the wholesale power market is unpredictable, and there may be occasions when the output of a solar farm must be sold at a very low price. In cases of overproduction from many projects, the price may actually become negative!

 

For the company offering the service, a solar PPA provides two key advantages: guaranteed revenue for the duration of the PPA, and predictable income because the price is established when the contract is signed.

The client also wins with a solar PPA, since they can rely less on local power retailers and their confusing pricing schemes. Also consider that price conditions are established upfront in a PPA, while normal electricity tariffs can increase without warning in a short period of time – many Australians saw their power bills double in less than a decade!

The Solar Industry Can Grow Faster with PPAs

From the business standpoint, another advantage of solar PPAs is helping solar providers grow their client base faster. When the PPA business model is deployed, the potential market for photovoltaic systems becomes larger:

  • When a company is dedicated exclusively to selling solar arrays, the market is limited to clients with the capital to purchase them upfront, and clients who can access financing to pay the solar array with a loan.
  • However, after solar PPAs are introduced, the market become much broader: Potential clients who were unable or unwilling to pay for a solar system upfront can now get their benefits at zero upfront cost by signing a PPA.

A similar logic applies for large-scale solar farms. When a solar developer is only focusing on utility projects, their growth is slowed down by paperwork and regulations. On the other hand, solar PPAs with private clients can be approved and developed at a much faster rate, and they are free from the volatile pricing of the wholesale market.

Investors often demand minimum profits and growth rates before providing their capital for a business venture. When solar power systems are deployed through PPAs, meeting both conditions is much simpler, compared with developers who focus only on the wholesale power market, or those who simply sell photovoltaic systems.

Conclusions

The development of the solar PPA business model has been highly beneficial for the solar industry, accelerating growth globally. Solar PPAs represent one of those success cases where a business models benefits all the parties involved: investors get higher profits, solar installers gain access to a larger market and constant revenue sources, and clients go solar at zero upfront cost… while getting lower kWh prices that are not available from normal power retailers.

As the cost of energy storage decreases, the range of services available with solar PPAs will broaden. When the concept was first developed, solar PPAs could only offer cheaper and cleaner electricity during daytime. However, when batteries are added to the mix, solar systems can become a 24/7 power source and a backup system during electric service interruptions.

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