In a previous article we wrote about the developments with Bank of America, Prologis and NRG Energy and the Department of Energy (DOE) loan guarantee for a portfolio of distributed solar projects in the US. We observed that the framework that these firms had developed along with the DOE program could be a harbinger for a solar securitization market. We noted that for the market for solar structured transactions to grow within a capital markets approach, it would require standardization of solar power purchase agreements (PPA) and lease contracts. In this article we will explore a standardized PPA in more detail.
A solar PPA is an agreement between a developer/investor of solar energy and a customer/ off-taker to purchase the solar power at an agreed upon price in a long-term contract. The developer/investor installs, maintains and retains ownership of the solar facility on a customer facility – be it a rooftop or other property. The customer pays only for the power generated by the facility and not for the cost of the equipment and installation costs.
On-going operation and maintenance is also the responsibility of the developer/ investor. A solar PPA agreement reduces the risk and cost for the customer by eliminating out of pocket capital expenditure. The agreement also locks in energy costs for 15 to 25 years, thereby reducing energy cost volatility for the off-taker.
The basics of a solar PPA cover:
Financing / Management
Developer/ Investor secures financing for the project
Sells electricity at the contract price for the term of the contract
Construction of Construction / Modification of Design
Warranty/ Insurance/ Sales Tax/ Income Tax/ Property Tax
Contractor Responsibility and Status Reports
Regulation/ Regulatory Issues
Conforming to State and local codes
PPA term (5 to 25 years)
PPA contract price
Escalation clause if any
Location of Facility
Extensions/ Early Purchase Option/ Residual/ Salvage Value
End of Term Purchase Option/ Transfer of Ownership
Operation and Metering
Initial Period/ Operation Period
Site Access Rights and Security
Standards for Operations
System Shut Down/ Decommissioning
Billing/ Invoice Delivery/ Payment/ Dispute Resolution
Net Metering & Utility Credits
Sales of Electricity
Metering and Delivery of Electricity/ Limits on Obligation to Deliver
Remote Monitoring/ Meter Testing
Solar Incentive Programs/ Ownership of Tax Attributes
The above outlines some of the key issues, though not by any means comprehensive, covering a solar PPA. Standardized PPA contracts for the solar and renewable energy sources will reduce costs for investors/ developers and off-takers and allow for more efficient analysis by the rating agencies and capital market investors.
Capital Markets stake holders – investors, deal arrangers and rating agencies prefer to have standard well defined structures that can be replicated and can be assessed using standardized risk assessment metrics. Standardization allows for economies of cost and allows for the development of standard models which can be used to develop a rating and risk criteria by all stakeholders.
Third-party models and analytics can provide access to robust models for analysis, thereby increasing the number of investors who can participate in transactions. Liquidity is a key need of investors and deal arrangers so that a robust market for a new asset class can be developed.
As we noted in previous articles, a liquid, transparent and standardized process for solar PPA securitization will benefit all stakeholders by providing transparency, broader appeal to investors, lower cost and wider access to capital, resulting in broader adoption of solar energy by consumers and commercial customers.
What are the next steps for a standardized SPPA?
A consortium of stakeholders and industry associations have to work together to develop something that is workable. This would include representation from investor groups, deal arrangers, rating agencies, law firms, EPC firms, manufactures and regulators to develop the standards for adoption by the industry. We all need to take charge of our energy future and developing a robust SPPA market is an important step towards achieving that goal. Please feel free to contact me and offer your comments on this important issue.
Photo: Shareholdes of Russia’s world biggest gas firm Gazprom arrive for the group’s annual general assembly in Moscow on June 30, 2011.
Editor’s Note: John Joshi is a managing director at CapitalFusion Partners LLC, an advisory firm focused on renewable energy and infrastructure projects. He also runs the Carbon Finance & Securitization group on LinkedIn. Mr. Joshi can be reached at firstname.lastname@example.org.