Solar Project Development – Why A PPA May Not Be The Best Approach
Power Purchase Agreements (PPAs) have played a key role in the traditional energy generation industry and have been adopted by the renewable energy industry as a means of financing high up front project costs.
While I applaud early pioneers in the solar industry for using PPAs, below are 4 reasons why I do not believe it is the best approach for widespread distributed solar project development.
1. Size – PPA providers generally want sizable projects. Most providers are looking for projects of over 1 megawatt (MW) and will only go as small as 250 kilowatts (kWs). This eliminates many projects from finding reliable sources of capital. There are many buildings, especially in urban settings, that have sizable rooftops with Southern exposure, but don't meet the minimum size requirements of PPA providers.
2. Credit – PPA providers also look for investment grade bond-rated hosts/power purchasers. This is great if your company is Walmart or another Fortune 500 company. The problem is that many viable host companies may have a desire to go solar and the ability to pay, but are passed over by PPA providers because they don't meet their stringent and inflexible credit requirements.
3. Time – PPAs for photovoltaic projects are generally 15 to 25 year agreements (but typically 20 years). This means the PPA providers will generally only look to building owners but not tenants as potential customers, since most leases are for less than 20 years. Commercial leases vary but typically are divided into 5 year increments with extensions, in some cases beginning with a 10 year initial term. This eliminates many potential hosts even though the lease term may extend multiple times for well over 20 years.
4. Legal Costs – PPAs are generally lengthy complex multiple agreement documents that require significant drafting time, negotiating and legal review. This discourages many hosts from taking on the hassle and expense of moving forward with a PPA.
PPA providers typically must be assured that the host will occupy the location for 20 years and operate under an agreement to buy all power produced by the system. As much as I can understand this quest for contractual certainty, I don't fully agree with this strategy which eliminates so many projects from being viable. Coming from a real estate background, I have little doubt that in most cases, if one user vacates another tenant will replace them (and the power company is often required to purchase the energy at a wholesale rate until the power would be purchased by a new occupant). Real estate has historically used vacancy factors in its financial underwriting, even when well known national or international investment-grade tenants are occupying space. Why can't a similar factor apply to PPAs? I believe that more attention must be given to solving landlord tenant issues to make solar a more attractive option.
In conclusion, there are many eligible hosts who are ready, willing and able to join the renewable energy revolution and do their part in helping our environment. However, the barriers to entry are just too high. PPA providers, banks and other sources of capital need to either become more flexible in their underwriting or consider offering alternatives to the PPA to open up the market to the masses in the business world.
As an alternative to PPAs, solar financing can work and can be cash neutral or cash positive under a lease structure or utilize other financial tools. We need to make this work for every business willing to make this commitment with solar being a viable option on a mass scale.