A Power Purchase Agreement (“PPA”) can typically last fifteen to twenty years, but solar PV systems have an operating life of twenty-five years or more. So what happens when the PPA term expires and the system is still operating? The party that purchases the electricity – the “host” or “offtaker” – usually has three options at the end of the PPA term: (i) renew the PPA, (ii) purchase the system at fair market value, or (iii) have the equipment removed.
Renew the PPA
Renewing a PPA at the end of the agreement term is arguably the simplest choice for a host customer. If the customer has had a positive experience over the term of the original PPA and enjoyed the benefits of purchasing solar electricity at predictable rates, renewal is an easy way to continue to experience those benefits. Some solar companies even offer a system upgrade with the latest technology when a PPA is renewed, and renewal term/extension lengths can vary. Additionally, renewal of a PPA can make more economic sense for the host customer compared to purchasing the system at a discounted rate (see next section), since PPAs do not require upfront capital expenditures by the host.
In the negotiation of any PPA, the host should preserve the ability to have this renewal option. The extension of the PPA can be made based on the economic needs of the owner at the expiration of the original PPA. Many PPAs have extension provisions built in which can provide some degree of economic certainty for both parties.
Purchase the System
Another option for the host customer at the end of the PPA term is to purchase the generating asset from the system owner. The purchase price can either be negotiated near the end of the PPA term or established, to varying degrees, within the contract terms of the initial PPA. However, any predetermined price for the purchase option cannot be less than fair market value due to tax requirements, as the risks of project ownership must remain with the investor that enjoys the tax benefits. Typically, the PPA may include a purchase option starting in year 6 of operation. This purchase option can be exercised at periodic intervals but cannot be a continuous option.
Remove the System
If the host customer is not interested in renewing the PPA or in purchasing the solar system, the system owner can remove the system from the premises. The party responsible for the cost of the removal of the system should be established in the initial PPA. Host parties should consider requiring Removal Bonds or establishing reserve funds to make sure project owners have the financial resources to meet any removal obligations they may have.
The Power Purchase Agreement has proven to be a very effective tool in the financing of solar PV systems. Our team feels that as the solar industry matures even further, module manufacturers consolidate, and the quality of PV technology continues to improve, renewal will become an increasingly popular option at the end of the initial PPA term.
John Hopkins is the project finance manager for Karbone, a renewable energy and environmental markets firm. Mr. Hopkins helps provide capital advisory services for renewable energy project developers and originates projects for Karbone’s client base of energy-focused investors.
Before joining Karbone, Mr. Hopkins was part of the East Coast project development team at SunPower Corporation where he was focused on conducting detailed financial analyses for large-scale solar PV projects. Prior to SunPower, Mr. Hopkins spent four years at Goldman Sachs in New York City as an Associate in the firm’s sales and trading groups.
Mr. Hopkins holds a Bachelor of Arts in Economics from Yale University.
Karbone is a renewable energy and environmental markets firm based in New York City. Karbone’s Project Finance group can advise parties who are evaluating their solar financing options or who are actively engaged in negotiating a PPA. The Karbone team has substantial experience in all aspects of PPA negotiations and can help identify the critical business terms to minimize risk and maximize performance of any potential project.
The above has been prepared and is being furnished solely for informational purposes, and does not consitute an offer to buy or sell any securities.
For more information please visit www.karbone.com.