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Solar Power Purchase Agreement: 4 things you should know

What is a Solar Power Purchase Agreement (SPPA)?

A Solar Power Purchase Agreement is a financial agreement where a third party developer arranges to design, permit, finance and install a solar energy system on the property of a customer at a minimized cost.

The generated power is sold to the host customer at a rate quite lower than what is obtainable with the utility retail rate in the locality.

With this SPPA in place, the host customer can buy the electricity produced by the solar system, rather than buy the entire system.

Reduced electricity charges

These reduced charges serve to make up for the purchase of electricity as the developer receives tax credits as well as income from the sales of electricity and other incentives derived from the system.

Solar lease is one other kind of third-party financing similar to Solar Power Purchase Agreements. The difference is that in the solar lease, there is no option for the host customer to buy the system.

Power purchase Agreements usually last between 10 and 25 years and the developer has the responsibility of maintenance and operation of the system within this period.

At the expiration of the agreement term, the customer may decide to buy the system or ask the developer to remove the system or even continue with the agreement by having a contract extension.

4 things you should know about Solar Power Purchase Agreements

1. Little or no initial capital cost

The customer will not bear the cost of designing, installing and maintaining the solar system.

It is the responsibility of the developer to provide all the above during the entire duration of the contract. As there’s no upfront payment, the host customer will benefit from the lower electricity price and will save money that would have been used for procurement of the solar system.

Low risk: As the host customer will not be responsible for operational and system performance, he avoids most of the risks associated with owning a solar system.

2. Potential increase property value

Usually a solar system will add more value to a residential property.

With a long term contract between 10 and 25 years, SPPA agreements are often transferred with a property sale from one owner to the other.

The right SPPA agreement will ensure long term electricity prices below the actual market price, which will increase the value of the property.

3. Market Adoption and Policy

SPPAs simplify the whole installation problems and provide an avenue to avoid the upfront huge capital outlay involved in PV system installation.

4. Low energy costs

With the SPPAs, there is always a fixed rate of payment throughout the duration of the contract.

The agreement is usually structured in two ways, depending on the preference of the customer:

  1. In the fixed plan, the rate paid at the beginning of the contract does not change until the end of the contract. The host customer is charged a fixed rate on a monthly basis throughout the agreement term.
  2. The other structure is based on an incremental rate. Here, the bill rises at a determined rate, usually between 2% and 5%, which is still lower than the projected price increase of utility electricity.

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