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Solar Power Purchase Agreements

What Is a Solar Power Purchase Agreement (SPPA)?

A Solar Power Purchase Agreement (SPPA) is a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its roof or elsewhere on its property and purchases the system's electric output from the solar services provider for a predetermined period. This financial arrangement allows the host customer to receive stable, and sometimes lower cost electricity, while the solar services provider or another party acquires valuable financial benefits such as tax credits and income generated from the sale of electricity to the host customer.

With this business model, the host customer buys the services produced by the PV system rather than the PV system itself. This framework is referred to as the "solar services" model, and the developers who offer SPPAs are known as solar services providers. SPPA arrangements enable the host customer to avoid many of the traditional barriers to adoption for organizations looking to install solar systems: high up-front capital costs; system performance risk; and complex design and permitting processes. In addition, SPPA arrangements can be cash flow positive for the host customer from the day the system is commissioned.

How do SPPAs Work?

Figure 1 below illustrates the roles of all participants in an SPPA.

Roles of SPPA Participants
Flow chart
Larger Image

Adapted from Rahus Institute's "The
Customer's Guide to Solar Power
Purchase Agreements" (2008).

A host customer agrees to have solar panels installed on its property, typically its roof, and signs a long-term contract with the solar services provider to purchase the generated power. The host property can be either owned or leased (note that for leased properties, solar financing works best for customers that have a long-term lease). The purchase price of the generated electricity is typically at or slightly below the retail electric rate the host customer would pay its utility service provider. SPPA rates can be fixed, but they often contain an annual price escalator in the range of one to five percent to account for system efficiency decreases as the system ages and inflation-related costs increases for system operation, monitoring, maintenance, and anticipated increases in the price of grid-delivered electricity. An SPPA is a performance-based arrangement in which the host customer pays only for what the system produces. The term length of most SPPAs can range from six years (i.e., the time by which available tax benefits are fully realized) to as long as 25 years.

The solar services provider functions as the project coordinator, arranging the financing, design, permitting, and construction of the system. The solar services provider purchases the solar panels for the project from a PV manufacturer, who provides warranties for system equipment.

The installer will design the system, specify the appropriate system components, and may perform the follow-up maintenance over the life of the PV system. To install the system, the solar services provider might use an in-house team of installers or have a contractual relationship with an independent installer. Once the SPPA contract is signed, a typical installation can usually be completed in three to six months.

An investor provides equity financing and receives the federal and state tax benefits for which the system is eligible. Under certain circumstances, the investor and the solar services provider may together form a special purpose entity for the project to function as the legal entity that receives and distributes to the investor payments from the sale of the systems kWh output and tax benefits.

The utility serving the host customer provides an interconnection from the PV system to the grid, and continues its electric service with the host customer to cover the periods during which the system is producing less than the site's electric demand. Certain states have net metering requirements in place that provide a method of crediting customers who produce electricity on-site for generation in excess of their own electricity consumption. In most states, the utility will credit excess electricity produced from the PV system, although the compensation varies significantly depending on state polices.

Read about the City of Pendleton, Oregon's system (PDF) (1 p, 282K, About PDF), for more information on how SPPAs work.

Benefits & Challenges of SPPAs
Benefits for host customer Challenges for host customer
  • No upfront capital cost.
  • Predictable energy pricing.
  • No system performance or operating risk.
  • Projects can be cash flow positive from day one.
  • Visibly demonstrable environmental commitment.
  • Potential to make claims about being solar powered (if associated RECs are retained).
  • Potential reduction in carbon footprint (if associated RECs are retained).
  • Potential increase in property value.
  • Support for local economy and job creation.
  • More complex negotiations and potentially higher transaction costs than buying PV system outright.
  • Administrative cost of paying two separate electricity bills if system does not meet 100 percent of site's electric load.
  • Potential increase in property taxes if property value is reassessed.
  • Site lease may limit ability to make changes to property that would affect PV system performance or access to the system.
  • Understand trade offs related to REC ownership/sale.

SPPAs, Renewable Energy Certificates (RECs), and Green Power Partnership Eligibility

In order to claim a system's on-site solar electricity production towards the Green Power Partnership's purchase requirements a Partner must retain the associated renewable energy certificates (RECs) generated by the system. Partners should take care in making environmental claims that extend past what is conveyed by the associated RECs owned by the system host. For more information on solar, RECs, and associated claims, read Green-e's Solar FAQs and Claims (PDF) (8 pp, 42K) fact sheet. Exit EPA Disclaimer

System hosts may choose to sell the RECs associated with the on-site solar PV system and in their place buy RECs sourced from other geographically eligible green power resources in order to make environmental claims. This process is referred to as REC arbitrage and allows the site host to capture the financial benefits of solar RECs, while also making environmental claims and meeting the Partnership's purchase requirements. For an in-depth discussion of RECs, review EPA's white paper on Renewable Energy Certificates (PDF) (6 pp. 996K).

Added Reading

The resources below provide additional information on SPPAs.

SPPA cover

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