Monopoly Energy Companies are poised to "go the way of Kodak."
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The Environmental Protection Agency
Solar Power Purchase Agreements
- What Is a Solar Power Purchase Agreement (SPPA)?
- How do SPPAs Work?
- Benefits and Challenges of SPPAs
- SPPAs, RECs, and Green Power Partnership Eligibility
- Added Reading
What Is a Solar Power Purchase Agreement (SPPA)?
A Solar Power Purchase Agreement (SPPA) is a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its roof or elsewhere on its property and purchases the system's electric output from the solar services provider for a predetermined period. This financial arrangement allows the host customer to receive stable, and sometimes lower cost electricity, while the solar services provider or another party acquires valuable financial benefits such as tax credits and income generated from the sale of electricity to the host customer.
With this business model, the host customer buys the services produced by the PV system rather than the PV system itself. This framework is referred to as the "solar services" model, and the developers who offer SPPAs are known as solar services providers. SPPA arrangements enable the host customer to avoid many of the traditional barriers to adoption for organizations looking to install solar systems: high up-front capital costs; system performance risk; and complex design and permitting processes. In addition, SPPA arrangements can be cash flow positive for the host customer from the day the system is commissioned.
How do SPPAs Work?
Figure 1 below illustrates the roles of all participants in an SPPA.
Roles of SPPA Participants
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Adapted from Rahus Institute's "The
Customer's Guide to Solar Power
Purchase Agreements" (2008).
Customer's Guide to Solar Power
Purchase Agreements" (2008).
A host customer agrees to have solar panels installed on its property, typically its roof, and signs a long-term contract with the solar services provider to purchase the generated power. The host property can be either owned or leased (note that for leased properties, solar financing works best for customers that have a long-term lease). The purchase price of the generated electricity is typically at or slightly below the retail electric rate the host customer would pay its utility service provider. SPPA rates can be fixed, but they often contain an annual price escalator in the range of one to five percent to account for system efficiency decreases as the system ages and inflation-related costs increases for system operation, monitoring, maintenance, and anticipated increases in the price of grid-delivered electricity. An SPPA is a performance-based arrangement in which the host customer pays only for what the system produces. The term length of most SPPAs can range from six years (i.e., the time by which available tax benefits are fully realized) to as long as 25 years.
The solar services provider functions as the project coordinator, arranging the financing, design, permitting, and construction of the system. The solar services provider purchases the solar panels for the project from a PV manufacturer, who provides warranties for system equipment.
The installer will design the system, specify the appropriate system components, and may perform the follow-up maintenance over the life of the PV system. To install the system, the solar services provider might use an in-house team of installers or have a contractual relationship with an independent installer. Once the SPPA contract is signed, a typical installation can usually be completed in three to six months.
An investor provides equity financing and receives the federal and state tax benefits for which the system is eligible. Under certain circumstances, the investor and the solar services provider may together form a special purpose entityfor the project to function as the legal entity that receives and distributes to the investor payments from the sale of the systems kWh output and tax benefits.
The utility serving the host customer provides an interconnection from the PV system to the grid, and continues its electric service with the host customer to cover the periods during which the system is producing less than the site's electric demand. Certain states have net metering requirements in place that provide a method of crediting customers who produce electricity on-site for generation in excess of their own electricity consumption. In most states, the utility will credit excess electricity produced from the PV system, although the compensation varies significantly depending on state polices.
Read about the City of Pendleton, Oregon's system (PDF) (1 p, 282K, About PDF), for more information on how SPPAs work.
Benefits & Challenges of SPPAs | |
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Benefits for host customer | Challenges for host customer |
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SPPAs, Renewable Energy Certificates (RECs), and Green Power Partnership Eligibility
In order to claim a system's on-site solar electricity production towards the Green Power Partnership's purchase requirements a Partner must retain the associated renewable energy certificates (RECs) generated by the system. Partners should take care in making environmental claims that extend past what is conveyed by the associated RECs owned by the system host. For more information on solar, RECs, and associated claims, read Green-e's Solar FAQs and Claims (PDF) (8 pp, 42K) fact sheet.
System hosts may choose to sell the RECs associated with the on-site solar PV system and in their place buy RECs sourced from other geographically eligible green power resources in order to make environmental claims. This process is referred to as REC arbitrage and allows the site host to capture the financial benefits of solar RECs, while also making environmental claims and meeting the Partnership's purchase requirements. For an in-depth discussion of RECs, review EPA's white paper on Renewable Energy Certificates (PDF) (6 pp. 996K).
Added Reading
The resources below provide additional information on SPPAs.
Third-Party Residential Solar Surging in California; Nearly a Billion-Dollar Business
New Hampshire, USA -- Statistics released this week by SunRun and the PV Solar Report show the growing popularity of residential solar energy in general, and third party-owned solar in particular.
Third party-owned solar installations have grown significantly in the past few years, and now represent more than half of new solar capacity in California and a handful of other states, according to Greentech Media. For residents, outright self-ownership might be more expensive up-front but could generate an overall higher return, but along with ownership comes decisions about maintenance and other issues, notes Stephen Torres, managing director of the PV Solar Report. With the third-party model, "all that other stuff is taken care of; someone will do it for you, and for lower overall cost."
Total solar energy systems in California rose 54 percent in 2012 to nearly 40,000, according to the PV Solar Report. In terms of contract dollar values, more than $1.2 billion of solar energy systems were sold, a 41 percent increase from 2011. Third-party owned solar delivered than $938 million to the California economy in 2012, an 86 percent jump from a year ago and roughly equaling the previous five years combined, according to their report.
San Diego, San Jose, and Bakersfield all reported more than 1000 total solar energy systems sold in 2012, and Los Angeles, Murrieta, and Temecula all doubled their total installations from a year ago.
Note what these communities have in common: a lot of sun, and high electricity prices. San Francisco is an outlier for the former, but certainly not the latter; it's also one of the bigger adopters of third party-owned solar.
Third party-owned solar system sales doubled to nearly 29,000, and now represent 74 percent of the state's home solar market, up from 56 percent of homeowners who went solar via the third-party route in 2011. San Diego, Murrieta, and Temecula, all tripled such systems from a year ago. Third-party sales are particularly favored in Clovis, Bakersfield, Fresno, and Murrieta, where they represented more than 80% of total systems sold in 2012.
"We are seeing notable growth across the board, with a particular emphasis on growth in median-income zip codes," explained Susan Wise, SunRun's 'consumer educator,' in an emailed response. "The concept that solar is limited to wealthy, coastal communities is a myth." (SunRun, of course, is among the vendors who provide such third-party solar services, from system ownership to maintenance to insurance.)
The wide adoption of third-party-owned solar systems are indeed taking a chunk out of the market of cash deals where the homeowner buys and owns the system), but not as extensively as expected, noted Torres. "We expected those to be cannibalized completely," he said, but cash sales have "really stayed the course."
Torres offered a peek inside the massive and granular master database, which tracks and compares solar systems at the city, installer, and component level. Another interesting correlation reveals the different marketing strategies among panel suppliers -- SunPower has the largest share of modules sold, and not by small margin, despite not having a presence among the top three installers who put in residential solar systems in California (SolarCity, Verengo, and REC). That illustrates the power of building a large installer network, as opposed to other panel brands which choose a price/volume strategy, he noted.
6 COMMENTS
@gregory-gunzelman-61902.....Lack of Science Education ?
"SunPower has the largest share of modules sold, and not by small margin, despite not having a presence among the top three installers who put in residential solar systems in California (SolarCity, Verengo, and REC). That illustrates the power of building a large installer network, as opposed to other panel brands which choose a price/volume strategy, he noted."
Nothing against SunPower, but the only reason they were able to "build a large network" was the fact that they had the highest efficiency/cost modules in the market, if that was not the case, I do not believe they could have acomplished the large installer network they have.
Nothing against SunPower, but the only reason they were able to "build a large network" was the fact that they had the highest efficiency/cost modules in the market, if that was not the case, I do not believe they could have acomplished the large installer network they have.
How do you explain all this activity in California with NO significantly corresponding activity in Florida or even parts of Texas?
Any statistics for the Institutional, Commercial and Industrial sectors?
Thanks,
Jon
Thanks,
Jon
Thanks for the great article. Has this information been compiled for the nation, for 2012, particularly for the 1st graph and the 2nd with States, instead of cities?
It would be interestng to see how so-called Community Solar Gardens fit in this picture, where residents and small businesses own shares in a shared facility, with their portion of output virtual net metered to their meter, credited to their bill.
That is so cute, I would of never thought of that. I am definitely making me one or maybe a few! Lol solar installation
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