October 14, 2020
Distributed Generation Series: Onsite Ownership vs. PPA
By Jacqueline Levere, Senior Analyst, Renewables Supply & Charley Hildt, Manager, Renewables Advisory
As a continuation of our Distributed Generation Series series, this post highlights the benefits, considerations, and differences between the two most common contracting structures for an onsite system: ownership and a Power Purchase Agreement (PPA).
What Is Solar Ownership?
The most traditional structure for purchasing onsite solar is by direct investment, or ownership. With ownership, a commercial or industrial buyer will pay a developer or an Engineering, Procurement, Construction (EPC) contractor to build a solar installation on their site. There are several financing mechanisms which can be used to purchase the system with the ‘cash option’ being the most common. However, those interested in mitigating the near term financial impacts of investment may utilize bank loans or government programs to increase short term liquidity. System maintenance costs can either be built into the installation cost or paid for as a subscription service over the lifetime of the project. Once the system is built, the buyer owns the solar asset and the energy it produces.
(For more information on sustainability claims, please see our previous article)
Benefits of Ownership
The expected return on investment is highest with ownership when compared to other contract or financing structures. Depending on the energy costs of the buyer and price of the system, a site owner could see a pay-back period in as little as 6 to 8 years. Additionally, owners with sufficient tax appetite can take advantage of solar tax credits to further improve the financial performance of the system and mitigating the impacts of tax implications.
The ownership model is also a strong choice for a corporate buyer who is unsure how long they will maintain ownership of their site as there are no complications added to the sale of the site if the onsite solar asset is owned. As an integrated component of the property, solar assets may also raise the long-term value of the property, increasing the sale value of the facility.
Drawbacks of Ownership
The main drawbacks of choosing the ownership model are the high upfront costs to install the system and longer-term obligations to effectively operate and maintain the asset. A large onsite system can easily cost millions to install. However, Property Assessed Clean Energy Financing (PACE) can shift up front project costs to annual property taxes over the long term, easing some of the up-front cost burden. Even with PACE, upfront costs will still be significant.
Additionally, with ownership, the owner takes on more liability on the safety and efficacy of the solar asset. To ensure the solar asset continues to safely and efficiently produce energy, the owner will likely outsource maintenance of the asset to an external firm. This will add additional long-term costs and administrative burden for the owner.
What Type of Buyer Should Select Ownership?
Buyers may find ownership to be the best contracting structure for their needs if maximizing economic value is their top priority, if they believe they might sell the site in the next 15 years, or if they can capitalize on the available tax incentives.
What Is an Onsite Solar PPA?
A Power Purchase Agreement, or PPA, is an agreement between solar project developer and energy buyer where the buyer pays the developer an agreed upon price for each unit of energy the system produces. There is not upfront cost or down payment for the energy buyer to enter into a PPA. The project developer will front all costs associated with developing, and constructing the system. it of energy the system produces. Operation and maintenance are included at no additional cost to the buyer.
Benefits of a PPA
The main benefit of a selecting to sign a PPA is that it allows the energy buyer to avoid upfront investment costs. This allows the energy buyer (or the buyer’s landlord, if the facility is leased) to potentially see savings right when the solar asset begins producing energy.
Signing a PPA also reduces the liability and long-term management required by the energy buyer. Because a buyer only pays for each unit the system produces, the developer is incentivized to maintain the system to meet performance guarantees. Additionally, if the project is underperforming, the developer will have to pay the buyer damages for the underperformance.
With the PPA structure, buyers also have the option to pass on the savings or costs of the PPA to any tenants they have in the building.
Drawbacks of a PPA
A key drawback of a PPA in comparison to an ownership structure is that they typically do not perform as well economically. The competitiveness of PPA pricing varies significantly on a state by state basis. While lower risk than ownership, PPAs are not risk free as they lock in a fixed price against a changing energy market: if energy prices go down, the PPA price will remain the same, inflating the buyer’s energy costs. Lastly, because the system is not owned, the site owner cannot take advantage of tax incentives..
PPAs involve a third-party sale of power, they are not available in every state based on local regulations. In these regions buyers not interested in owning the solar asset will have to use other financing mechanisms to mitigate up-front costs, such as a lease, in order to complete the transaction.
Beyond economic drawbacks, a PPA will create significant complexities if the site owner decides to sell their site before the PPA contract has terminated.
What Type of Buyer Should Select a PPA?
Buyers may find a PPA to be the best option for them if they would like to engage in solar without an upfront investment, do not want to actively manage the project over time, and do not have plans to sell the site.
Making the Decision:
Energy buyers looking at adding solar to their facilities should consider long term involvement, access to capital, and ease of maintaining the solar asset. The following table condenses many of the key decision points discussed in this article. While the table captures key points noted in this article, each facility will also have site specific needs, that will determine the structure most beneficial for the end user.
|Summary||System purchased upon COD; maintenance may or may not be included||Power purchased per kWh produced|
|Capital Cost||High Upfront Cost||No Upfront Cost|
|Impact on Energy Use||Direct||Direct|
*ROI & economic viability will vary by state
Are you considering onsite solar ownership? Want to learn more about if an onsite power purchase agreement is right for you? Reach out to our team; we look forward to connecting with you.