What Does Solomon Look For In a PPA?

Electricity consumers seeking to offset their consumption with power produced by solar photovoltaic (PV) cells can finance their solar projects in three ways:

  • Outright purchase.  A commercial building owner may use its traditional lines of credit or secure new project finance to build a project.  The debt will be amortized over time through monthly payments.
  • Lease.  A municipality or commercial building owner may agree to lease from a third party solar developer a solar array that the developer builds on the roof and that will produce electricity for the building.  Alternatively, a consumer may enter into a lease of all or a portion of meters installed on land within its local utility’s territory.  Such projects are known as Virtual Net Metering or Remote Net Metering projects.  The consumer will receive a credit on its bill in the form of a volumetric or financial offset for the power produced by the project.  The building owner will pay a monthly lease payment for the project to the third party developer.
  • PPA Payment.  As with a lease, a muni or commercial building owner may permit a third party to install solar panels on its roof or on a solar farm.  In lieu of a lease payment the building owner will pay a price per kilowatt hour (kWh) of Alternating Current converted at the inverter from the Direct Current produced by the solar PV array.

In the last case, the building owner will enter into a Power Purchase Agreement or PPA with the solar developer.  The PPA will set out the terms under which the project will be built and the owner will pay for the electricity produced.

PPAs are the most important agreements put in place for solar projects that are not owned by the host building owner.  In the case of a PPA the building owner pays only for electricity produced by the solar PV array.  If the panels do not perform the owner is protected from financial exposure (except to the extent of any opportunity cost associated with its failure to obtain an offset to its traditional utility consumption).

We are often called in to help our clients negotiate PPAs with solar developers.  In this article we discuss the most important features of PPA agreements.  Bear in mind that PPAs require mutual agreement by solar developers and the project hosts.  There may be provisions that either the developer or the host wishes to adopt in a contract but which the other side may not concede.  All negotiations involve a balance of equities.  Some people say the perfect deal leaves each of the parties equally happy and unhappy.  We highlight important areas to address but must underscore that each of the parties will generally not get 100% of what it wants in a deal.

Term

Terms generally run from 15-25 years.  The longer term the lower the PPA price per kilowatt hour; after all, with a longer term the total amount of payments can be spread over a larger amount of solar production.   However, note that a developer is looking at the net present value of a stream of payments, not the total of payments.  If interest rates are high or the risk of collection is high the value today of a payment between, say, Year 21 and Year 25 will not be high.

Production

A solar PV array will have a certain amount of nameplate Direct Current capacity.  In other words, the manufacturer of the panels will certify that the panels are capable of producing a certain amount of electricity per hour in direct sunlight.

The actual production of panels will depend on a few factors:

  • The quantity and quality of the panels and the presence or absence of defects;
  • The efficiency of the inverter or micro-inverter that converts the Direct Current produced by the panel into Alternating Current;
  • The amount of sunlight (insolation) over the course of a year; and
  • The amount of annual degradation, generally conservatively estimated to be .5% per annum although actual degradation is often less.

The most important of these factors is the quantity and quality of the panels.  A solar host will generally want the most production possible (as long as the production does not exceed the host’s annual consumption – any excess production over the course of a month or year, depending upon local rules – will be forfeited to the utility).  In the case of a rooftop array where space if finite, a host will want panels that produce the largest number of watts per panel.

Similarly, a host will want panels that are of high quality (Tier 1 or 2, preferably) and are not subject to defects.  Not only is quality important for production but it will also be required by financial institutions that may be called upon to extend credit for the PV array.  See How Do I Choose a Solar Contractor.

In addition to checking for the specifications of solar panels a host will also want to know about the quality of the inverter being specified by the solar developer.

Warranties

What is the length and quality of the warranty from the manufacturer, for both the solar panels and the inverter?  20-25 year warranties are common for panels whereas inverter warranties may be limited to 10-15 years.  Warranties must be examined to make sure they are not subject to voidance in the event, say, that repairs are made to a roof or wires are installed in a manner that is not specified by the inverter manufacturer.

Obstructions; Roof Condition; etc.

A number of factors could interfere with solar production.  A solar developer will want to shift the risk of shade cast by trees (20 years is long enough for acorns to turn into big oaks).  At the same time a host will want to know that a PV array does not cause roof penetrations that result in leakage or mold.

Construction Responsibilities

A PPA should clarify the parties’ respective responsibilities for seeking permits; assuring that rooftops can bear the weight of solar PVs with or without ballasts; assuring that there is no risk of wind-shear lifting and tossing panels; assuring there are no hazardous wastes on land used for ground-mounted solar; confirming that there are no risks of subsidence or drainage or interference with precious ecological resources or archaeological artifacts.

Default

What happens if a manufacturer goes bankrupt and a warranty ceases to be valuable.  (Think, for example, of consumers of Solyndra panels after that company declared bankruptcy.)   What happens if a solar developer ceases to maintain the panels.  What if the host fails to make its PPA payments?

Cancellation Rights

Hosts will want to have the flexibility of cancelling a contract before construction begins.   Developers, on the other hand, may wish to be reimbursed in the case they lay out funds on interconnection agreements and other engineering-related costs.

Indemnification

Both parties will want to be indemnified against damages that arise through no fault of their own.  Bear in mind that some corporations have by-law restrictions that limit the nature of warranties they have the legal right to deliver to their contractual counterparties.