To have a successful business model, three ingredients are very important: technological feasibility, market demand and financial viability. If one of them is missing, the business idea fails sooner or later. The solar PPA business model provides a great example of how to balance these three elements by connecting key players in the energy industry.
First of all, the product or service being considered for a business idea must be technologically viable. Think about teleportation: a science fiction concept that would have a huge market demand in the real world, but we don’t even know if it’s possible yet. Generating electricity from the sun was also impossible just a few centuries ago.
Once a concept becomes technologically viable, you need a market segment that has demand for it, and must develop a lucrative way to serve your potential customers. The first experimental solar panels date back to the 1800s, but they were very inefficient and commercial electricity hadn’t been developed yet – in other words, there was no market for these solar cells. Electricity had to become commercial first, and then solar panels had to become efficient and affordable enough to be considered a viable power source.
For a long time, a key barrier for deploying solar power systems was their high upfront cost. This resulted in a long payback period and a low return on investment, which few customers were willing to assume. However, manufacturing innovation and economies of scale gradually reduced the cost of photovoltaic systems, while the business model of the solar power purchase agreement (PPA) was developed in California.
The solar PPA business model has been successful because it connects two key groups with photovoltaic system developers:
Under a solar PPA, investment capital is used to supply a photovoltaic array for the client. In exchange for not paying the upfront cost of their solar systems, clients sign contracts where they agree to purchase electricity from the installation over a specified period. These electricity sales provide the constant stream of income that investors are looking for.
However, this concept only works if the deal is beneficial for both the end user and the investor. Solar PPA providers accomplish this in two main ways:
The lower electricity price makes solar PPAs attractive for electricity consumers. On the other hand, investors can feel confident because the client signs a legal document, while the solar system provider takes responsibility for operation and maintenance.
When solar system components come from reliable manufacturers, warranties make the PPA business model even safer for all parties involved. Solar panels typically come with 10-year manufacturing warranties and 25-year energy production warranties, while inverters are normally rated for 10 years. This ensures the equipment supplier will take responsibility if any solar system component fails prematurely.
When electricity consumers deploy commercial solar systems by signing PPAs, it does not always mean they cannot afford the systems. In many cases, they are simply choosing the solar PPA option for the benefits it offers:
In other words, a solar PPA provides a low-risk method to deploy a photovoltaic system. No capital is committed upfront, and the installer is responsible for keeping the solar system under optimal conditions.
Solar PPAs can also be used as protection against future increases in electricity tariffs. Consider that the kilowatt-hour price in a PPA is established in a contract, while the electricity supply from conventional power retailers is subject to unpredictable price increases.
In addition to charging high kWh prices, Australian power retailers are notorious for their confusing electricity plans. These include many complex pricing schemes and conditions, and the kilowatt-hour price is not always clear. There are also misleading electricity tariffs that seem like a good deal, while you are actually paying more than necessary. For example, a 15% discount on an electricity plan that is overpriced by 30% is by no means a deal – it is actually a legal scam!
When the solar PPA business model is deployed properly, it benefits all parties involved: clients, developers and investors. The client provides a revenue stream while saving on electricity, the solar developer provides the technical expertise, and the investor provides the capital required for operational PV systems.
Without solar PPAs, the market for photovoltaic systems would be reduced drastically.
If you have doubts about the financial viability of photovoltaic systems, consider that Warren Buffett has invested aggressively in the solar industry. He is considered the world’s greatest investor and is characterised by focusing on businesses he knows well, while staying away from high-tech sectors. However, he made an exception for solar power and has developed some of the largest solar farms in the USA.