What is a PPA? A Power Purchase Agreement (PPA) is a retail energy sales scheme whereby a solar or energy retail company installs solar panels on your roof with no financial outlay needed from you. The only agreement being the purchase of the solar energy that is created. You pay for the ‘consumed’ solar energy which is energy that your home or business has used.

We are asked on many occasions – What is a PPA and how can it benefit me?

There are a few pros and many cons with a PPA and I will outline those issues a little later, but for now – the most important thing to remember is that you are not getting solar panels installed for FREE!. Nothing is for FREE in this day and age – except Sunlight of course!

If you sign up to a PPA then what you are doing is giving a solar or energy retail company the rights to use your roof to install their solar panels and equipment. The rights to that equipment will always stay with the energy retail company until such time that you have purchased that solar equipment outright

In exchange for the right for a energy retailer or solar company to install solar equipment on your roof at their cost – you agree to buy “solar energy” which this system generates. You are only charged for the solar energy that you actually consume. You are not charged for the surplus energy that is fed back to the grid.  Where a PPA does seem attractive is based on the fact that you can buy this solar energy for less than what you pay for normal grid energy. Remember that energy is energy and that it is all the same, the only thing that differentiates energy is how it is produced which is either from the burning of fossil fuels or from renewable energy technologies like wind, solar or hydro.

OK, so at this stage a PPA looks all fine and dandy in that you have not paid for any of the solar equipment and you can in fact save on your energy bills by buying ‘clean’ energy cheaper than what you would pay for coal energy. So what are the downsides to a PPA?

In my opinion, PPA’s will never take off in Australia and this is why.

  • PPA’s originated in North America and were exceptionally popular around 5-7 years ago – and still are in some states. The reason being that energy costs in some states were exceptionally expensive due to demand for energy exceeding supply. This created a scenario where homes and businesses could simply sign a contract to buy ‘cheaper’ solar power for say 7 years through a PPA. The USA has a very attractive tax structure in place that acts as an incentive to those who signed up to a PPA. In Australia we do not have the same tax incentive around PPA’s.
  • Typically a PPA will be a contract to buy ‘reduced’ cost energy for a minimum of 7 years.  You are obliged to maintain that purchase agreement for the duration of the contract or you are liable to buy the solar equipment outright. The solar equipment is often inflated over and above what that sized solar system would be ordinarily valued at thus if you default on the PPA you are liable for buying a pretty expensive solar system which is valued at the purchase price of when the PPA was first initiated.
  • In Australia, most PPA’s are sold as a 10 year contract. This is a very long time to commit to buying energy especially when the energy market in Australia is in a period of transformation. The major argument presented by those who sell PPA’s is based around consistent energy price increases. Buying a PPA will lock in a fixed price for clean energy for 7, 10 or 12 years. What happens if the cost of retail ‘black’ energy drops below the fixed PPA cost? This is a scenario that a PPA sales rep will rubbish as something that could never happen and that argument is presented on nothing more than historic energy price increases. The fact of the matter is that the massive uptake in solar is having a downward pressure on wholesale energy costs during the day. Its quite feasible that energy companies will start to apply correct pricing to businesses on commercial TOU (Time of Use) rates.

In summary, a PPA could be attractive to a large commercial / industrial operation that is a well established business with high energy demands and costs. Locking in reduced energy rates for a period of 10 years may not be an issue for certain businesses. There would be a bit of a gamble on where retail energy prices are headed, but it may be a worthwhile punt for some business owners.

A PPA is most definitely NOT a sensible decision for a domestic/residential set up. The PPA could end up costing you thousands of dollars to break the contract – or alternatively should be looking to sell your property, you would either need to buy the solar equipment (at an inflated cost) or make sure that the new home owner takes over the PPA.

In my opinion, power prices will come down which by itself is the final dagger in the back for PPA’s.

 

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