Power Purchase Agreement
A Power Purchase Agreement (PPA) is a legal contract between an electricity generator (commonly a utility company) and a host site owner or lessor. The host site owner or lessor purchases energy or capacity (power or ancillary services) from the PPA Provider (the electricity generator). Such agreements play a key role in the financing of electricity generating assets. Under the terms of a PPA, the PPA provider (the electricity generator) typically assumes the risks and responsibilities of ownership when it purchases, operates, and maintains the turnkey facility.
The PPA provider secures funding for the project, maintains and monitors the energy production, and sells the electricity to the host at a contractual price for the term of the contract. The term commonly ranges between 5 to 25 years. In some renewable energy contracts, the host has the option to purchase the generating equipment from the PPA provider at the end of the term, may renew the contract with different terms, or can request that the equipment be removed.
By clearly defining the output of the generating assets (such as a solar electric system) and the credit of its associated revenue streams, a PPA can be used by the PPA Provider to raise non-recourse financing1from a bank or other financing counterparty. Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy. In the United States, the solar power purchase agreement (SPPA) depends heavily on the existence of the solar investment tax credit, which was extended for eight years under the Emergency Economic Stabilization Act of 2008. The SPPA relies on financing partners with a tax appetite who can benefit from the federal tax credit. Typically, the investor and the solar services provider create a special purpose entity that owns the solar equipment. The solar services provider finances, designs, installs, monitors, and maintains the project. As a result, solar installations are easier for customers to afford because they do not have to pay upfront costs for equipment and installation. Instead, customers pay only for the electricity the system generates.
