If you have read some of our previous articles, perhaps you are familiarised with how a solar Power Purchase Agreement (PPA) works: The supplier installs the photovoltaic system at zero upfront cost, and the client agrees to purchase electricity from the system for a specified term. The deal is attractive for the client because the PPA electricity price is much lower than the electricity tariff, and the system provider is responsible for maintenance and component replacements.
A solar PPA is a win-win business relationship, where both technology providers and clients get benefits that are not available otherwise. Consider that network costs represent half of the power bill for some Australian electricity consumers, which means you can end up paying up to 50% less with a solar PPA.
Homeowners and businesses who pay for a solar PV system upfront get some extra savings in the long run, since they don’t have to cover the operating costs of a solar PPA provider. However, there are also significant challenges to overcome:
Owning a solar power system also involves assuming the upfront cost. Even if the client has the funds to spare, there is an opportunity cost – these funds could be invested elsewhere.
For solar power developers, selling electricity through solar PPAs can often be more attractive than participating in the wholesale market. Consider that government regulations can change the market outlook at any time, and kilowatt-hours must be sold in a variable-price spot market. In other words, it is impossible for solar power developers to predict their income with certainty.
In a solar PPA, on the other hand, electricity prices are agreed with the client upfront and a contract is signed. The client gets a stable kWh price, and can rely less on network operators and their hefty electricity tariffs. On the other hand, the PPA provider gets a guaranteed sales price for electricity produced. In short, a solar PPA removes the middleman from electricity sales and both parties involved get better conditions.
Thanks to the guaranteed and stable income, the solar PPA business is attractive not only for suppliers, but also for financiers. An example of this is Warren Buffett: he is possibly the most successful investor in the world, characterised by staying away from technology sectors, but he has invested massive sums of capital in solar power.