What is a Photovoltaic PPA?

What is a Photovoltaic PPA?

A Photovoltaic PPA (Power Purchase Agreement) is beneficial to both energy buyers and developers. They allow an energy buyer the ability to invest in solar energy without having to invest initially in the expensive infrastructure to support the technology, while energy developers can secure funding for a longer period. This is because PPAs involve installing PPA panels at the location of the energy buyer, and a contract is drawn up between an energy buyer and an energy seller that fixes the price of energy for the period of that contract, for example, ten years, regardless of whether the price of energy goes up or down.

It is an increasingly popular financing model for renewable energy, helping businesses achieve sustainability and cost savings. They are a strategic tool for organisations looking to access renewable energy without upfront investment.

How does a Photovoltaic PPA work?

Role of the developer/owner. A PPA developer or owner enters a PPA agreement with an energy buyer. They facilitate the installation of the solar network on the property of the energy buyer and can provide maintenance of the site. The energy buyer then pays the developer for the energy generated.

Role of the buyer/off-taker when the energy buyer enters a solar PPA, they agree to host the solar network on their site. While they don’t own the solar equipment outright, the energy generated on their site will be the energy they consume on-site.

On-site vs off-site arrangements, Energy buyers can decide to enter either an on-site or off-site solar PPA. It should be noted that off-site solar PPAs tend to be a less economical way to invest in a solar PPA compared to on-site.

Benefits of a PV PPA for buyers

PPAs can be a popular and beneficial contract for both energy sellers and procurers. We take a look at what makes them attractive for both parties.

No upfront capital costs

Energy purchasers who do not have the upfront investment for renewable energy but want to invest in solar power can benefit from a solar PPA by entering an on-site PPA. As well as the cost of development, installation and the technology itself, the energy procurer can potentially avoid the cost of ongoing maintenance of the facility.

Predictable energy pricing

PPAs tend to be fixed from the start of the contract, meaning that the energy buyer should pay the price fixed for the entirety of the contract. This avoids the volatility associated with buying renewable energy in a traditional renewable energy purchase, in theory allowing for predictable energy prices. This allows the buyer to forward plan and budget for the lifetime of the PPA, as they know how much their energy costs will be for that period. This can avoid energy price spikes.

Meeting sustainability and net-zero goals

One of the reasons many energy buyers enter solar PPAs is that they have sustainability and net-zero goals they want to achieve. Solar PPAs offer a guaranteed way to help achieve those green energy goals. This could be by improving the reputation of a business by highlighting its investment in development and use of green technologies, or it could be by incorporating Guarantees of Origin, which allow the energy purchasing businesses to verify to other companies and customers that the source of their renewable energy is 100% green and generated on-site. The social side of ESG (Environmental, Social, and Governance) goals can also be achieved, by verifying that the source of renewable energy is not exploiting employees. It could also help to support the building of an accurate carbon footprint, which could lead to accurate reporting for net-zero targets.

Benefits of a PV PPA for developers

The key benefit for solar PPAs for energy developers is the guaranteed long-term revenue streams that accompany them. With a guaranteed revenue stream, more investment can be made into solar technologies, making the scalability of solar installations a reality. Once this pathway to develop and install solar networks on the buyer’s premises is established, developers will have a proven method for rolling out solar PPAs for lenders or investors. This results in easier access to financing future projects under the same model.

Types of photovoltaic PPAs

Energy developers offer one of two types of solar PPA arrangements: on-site PPAs, which are rooftop or ground-mounted solar at the buyer’s site, or off-site or virtual PPAs, which tend to be comprised of solar farms feeding into the grid. As well as an on-site PPA, an off-site PPA or a virtual PPA can be arranged, which allows the purchase of solar energy as credits to offset a buyer’s energy costs.

Key considerations and risks

While solar PPAs are a beneficial agreement for both parties, there are also risks involved with entering this type of agreement, as with all legal structures.

Long-term contractual commitments

While long-term PPAs are a benefit for many energy buyers because they fix the price of energy for a long period, avoiding energy price hikes, this also avoids any cost savings that might occur as a result of energy prices reducing over time. As the cost of renewable energy drops as the technology becomes cheaper due to research, development and manufacturing changes, the price of energy may also drop, and energy buyers in a long-term PPA will not see this benefit. In this case, a shorter-term PPA may be more desirable due to its flexibility.

Performance and maintenance risks

Most solar PPAs include maintenance and repair of the solar system, because the energy buyer does not own the equipment; it just hosts it on-site. However, solar PPA is a sensitive technology and it suffers from performance and maintenance risks, like all renewable technologies. When a renewable system experiences a fault, it results in blackout periods, which means energy is not generated, and the set price of energy is lost, and other backup sources have to be employed. This is also the case in the instance of performance issues - solar arrays need a certain amount of sunlight to operate at full capacity. As the weather can be changeable, output can be varied, meaning an energy supply can be interrupted.

Photovoltaic PPAs deliver clear benefits for both energy buyers and developers. Buyers gain cost stability, green credentials, and progress toward net-zero goals, while developers secure long-term revenue to expand solar capacity. Despite risks such as long contracts and performance challenges, PPAs are becoming a cornerstone of renewable energy finance and a strategic pathway to a more sustainable future.