Anatomy of a Power Purchase Agreement

“We’re building an industry from ground zero.”

You don't negotiate the terms of a mortgage when you buy a house -- it's a pretty standard document. And you sign with the bank, not the realtor, not the builder and usually not the seller.

But if you want to enter a power purchase agreement (PPA) to finance a solar system on a commercial or residential roof, there is no standard document and there is no standard entry point -- you can get the PPA through a variety of integrators or through a PPA firm.  Doug Payne, the Executive Director of SolarTech, and his organization are driven to improve this situation, as well as to accelerate the entire solar installation process.  He led a panel today at an Agrion event that explored the anatomy of a power purchase agreement.

A standard Doug Payne/SolarTech theme is that is all comes down to dollars per kilowatt-hour. 

Payne said, "From a macro standpoint, 2006 to 2008 was just grab your seat belt and hold on -- it was all early-adopter opportunities.  You have to toss out 2008 because of the credit crisis.  There is no doubt that things have improved in the last six to eight months."

PPAs are relatively new in solar power, but not in the power generation space as a whole.  Typically, the agreements have been drawn up for immense amounts of power and have taken years to negotiate.  Solar PPAs are for smaller amounts of energy and need to close fast. SolarTech is trying to speed that process by offering a standardized PPA document, which is available at their website.
 
A case study covered at this panel is the recently announced, Santa Clara County-led Regional Renewable Power Purchase Initiative, a partnership which includes nine Bay Area cities and will purchase 14.4 megawatts of renewable power.  According to Ben Foster, Vice President of Operations at solar consultancy Optony, this project has moved ahead faster than most government projects.  It's a good example of public sector / private sector cooperation and is a hopeful sign.

Two of the major challenges to adoption of renewable energy include the barrier of high upfront costs.  Power purchase agreements go a long way toward solving this problem, but they have their own set of flaws and advantages.  Today's panel explored the state of PPAs.

Marc Roper, the VP of Sales at PPA firm Tioga Energy, was the panelist most deeply entrenched in the PPA industry.  Tioga works on PPAs for distributed generation in the several hundred kilowatts to multiple megawatts range.  

Roper said, "It's hard to be an innovator as a PPA provider -- we have to minimize technology risk.  We are going to be at the tail end of the adoption curve."  He added that new solar technology like "tracking, exotic materials, new types of electronics [like microinverters] -- we are a  little less likely to adopt those."  Most of those technologies will have to get to market through other means than PPAs. 

It's the independent engineers doing the due diligence for the financiers that determine "bankability," according to Roper.  What this means is that smaller VC-backed companies are going to have a hard time breaking into the PPA product path.

As a recap, Roper said, "The PPA industry was put on ice in 2008 to 2009, but investors have come back to the market" mostly through tax grants from the Obama Administration's American Recovery and Reinvestment Act (ARRA).   "The PPA will continue to dominate medium- and large-scale systems, said Roper, adding: "PPA rate of return is in the 8 percent to 12 percent range" and "we're looking forward to the day when the PPA is a standard form."

"With the recent involvement of utilities, we think the PPA market is going to grow," said Roper, concluding, "We are in very early days in the solar industry and the solar financing industry. A lot of things need to be tried and some need to fail.  We [PPA providers] are the most conservative element of an industry on the leading edge."   

Other solar PPA firms include SunEdison, Recurrent Energy, Solar Power Partners and in residential -- Solar City and SunRun.

Payne added, "There has never been a solar industry in the U.S. There are no wrong answers. We're building it as we go. The key is to get a many things right as fast as we can, or learn quickly and adjust."