Power Purchase Agreements or PPAs are one of the most important business model innovations in the clean energy space. As our newest Advisory Board member Jigar Shah — who successfully pioneered the model as the basis for establishing SunEdison as an early leader in the solar field — notes, it represents one of the guiding paradigms of the 21st century, “infrastructure as a service.”
The best infrastructure solutions generally cost more upfront and have lower operating costs. As with majestic bridges and well-planned cities, quality costs more upfront. This is also true for renewable energy solutions like solar and hydropower or vehicle solutions like electric and natural gas vehicles. Buyers have to pay more upfront and save on operating costs over time.
The way PPAs work is that the solar company finances the system entirely and then charges the user only for the kWh that it generates. The price, which is in many areas lower than the cost of utility-delivered electricity, covers all costs including maintenance while having enough profit to pay investors back with interest.
The customer loves this concept because they save the upfront investment and all of the maintenance staff needed to maintain [the system]. With an asset life of over ten to twenty years, customers can get access to the best infrastructure that saves them money over the longer term.”
In other words, even though the system being financed may take several years to break even, the customer sees the savings right away, in the form of lower energy costs.
A solar lease operates in much the same way, except with a fixed monthly cost to rent the equipment and often a guarantee of a minimum amount of production for less than the customer is currently paying the utility for the same amount of energy.
In both cases, however, “The benefits of owning the system, such as purchase rebates, tax credits, the ability to take depreciation, or other incentives belong to the PPA provider or leasing company,” and is part of what allows them to offer the service profitably.[1] Many customers accept these terms because they lack the upfront capital and/or can’t take advantage of the incentives; but most also realize that they could be paying even less if they owned the system.
PACE provides this alternative. By financing the purchase of the system through the property tax mechanism, the building owner gets to keep all of the incentives and tax credits that come with owning the system, while still having a lower monthly cost than with utility-supplied power. In addition, while the “liability” is off the balance sheet, the value of the asset is recognized right away. The finance charges are treated as an operating expense (literally, the cost of borrowing the money), while the production cost savings accrue to the property owner.
In The “Other” Type of Commercial Financing, Daryl Zeis of REC Solar notes:
PACE is a win-win for both the business that wants to go solar and the PACE lender. It’s a win for the business because it can own a solar system with no upfront costs, get free electricity for 20 years, plus receive any available solar rebates and tax incentives. It’s a win for the lender because the PACE loan is paid back through a special tax assessment on the business’s property, which makes the loan extremely secure, even from bankruptcy.
The advantages for businesses include:
- No upfront costs. Just like a commercial solar PPA or a solar lease, your business gets to go solar and save money on electricity without any upfront costs.
- Easier credit. Because PACE is secured through a special tax assessment, it’s much easier for your business to be approved for a PACE loan than an unsecured loan. That means that new businesses without a long credit history or have low real estate equity due to the recession may still be eligible for a PACE loan.
- You own the solar system. With a solar PPA, you’re only renting the solar system for 15 to 20 years. You do save on your electricity bill with solar PPAs, but not as much as when you own the system. Plus, when you own the solar installation, you get to keep it running for as long as it lasts — typically 25 to 30 years, or even longer.
- You get to keep the rebates and tax incentives. If your city or state has any solar rebates, you get to keep that cash, plus any tax incentives, such as the 30 percent Federal Investment Tax Credit. With a solar PPA, the PPA company owns the system, so it keeps the tax incentives, rebates, and any other incentives.
- It’s a long-term loan. PACE loans can vary by the lender, but they’re typically a 20-year loan. That makes your payments small, and they should equal an amount less than your old annual electricity bills, especially when you include the free solar electricity savings.
- The special tax assessment is transferable. What if you sell your business or want to move your business to another location? The special tax assessment will be transferred to the new property owner, who will continue to make any remaining payments through the special tax assessment—and continue to receive the free electricity through the solar panels. In short, the solar system always stays with the original PACE property until the loan is paid in full.
In addition to being more advantageous than solar PPAs or leasing, PACE also applies to energy conservation measures and energy-saving equipment whose “production” is no less real but harder to meter. As a result, PACE can be used for a much wider array of energy and indeed other improvements, such the resiliency elements incorporated in A3898/S2632 currently before the legislature, with the benefits accruing to the property owner right away while the payments are spread out over the useful life of the improvements.
[1] For a side-by-side comparison of PPAs vs. leasing, see http://www.energysage.com/solar-lease/lease-ppa-whats-the-difference.