Power Purchase Agreements – are they right for you?
With affordable finance conditions – and suggestions the Reserve bank of Australia could even take the cash rate into negative territory – there’s a steady stream of enquiries for Power Purchase Agreements (PPAs) in the commercial and industrial sector.
Added to the financial climate, the evolution of the model in recent years – especially within the walls of Solgen – has delivered more innovation and transparency to businesses thinking about PPAs for significant energy savings and certainty in outgoings.
Solgen has helped businesses from both the buyer and generator side of several PPAs since 2015. In fact, we arranged one of the very first commercial PPAs signed off in Australia for iconic wine producer, Tyrrells. Since then, we’ve developed a pretty good understanding of how to optimise the model for businesses. At the same time, we understand which businesses are right for it, and which aren’t.
We’re great advocates of PPAs and the benefits they can deliver. But PPAs aren’t right for every business: it’s only after we’ve sat down with a client and understood their operations that we can objectively recommend whether a PPA is the best solution for them, over the length of the agreement.
The benefits of Power Purchase Agreements
Large energy users can reduce their environment and economic impact through PPAs.
In short, they agree to buy energy from an energy generation asset (in this case: solar) at an agreed rate. The rate is dependent upon a number of factors and the differential in that rate compared to existing rates that the business purchases energy for represents savings that fall to the bottom line.
It’s typically a long-term agreement that rewards the buyer on their commitment to increase their clean energy consumption. It affords them a ‘set-and-forget’ approach to outgoings.
What’s driving the move to PPAs?
Large corporates such as Google, Nike, IKEA and other multi-nationals have been party to Corporate PPAs in the Americas for a long-time. The Australian market on the other hand has been slower to take up an off-balance sheet approach to solar.
Early adopters of solar and PPAs in the Australian market have included government at the state and federal levels driven by mandated commitments around reducing emissions or moving toward an emission-neutral level.
As the solar industry has matured so too have purchasing options such as PPAs. Solar is viewed as a very low risk and stable energy generation asset. Combined with lower funding costs and significant declines in system costs, the price of energy under a PPA has toppled.
The business case for PPA’s is driven by the difference between the customer’s electricity spend and the PPA rate. Savings are derived on the basis that the PPA supplies power at cheaper rates than alternatives available to the business.
PPAs have become much more than just the business case of today. Our approach covers integration of battery storage and other technologies that can grow these savings well into the future.
In case there is a concern that grid energy prices may fall, our PPA lifecycle shores up the value over the term of the agreement. In addition, The Australian Energy Market Operator (AEMO) has indicated wild fluctuations in the wholesale energy price are less likely. Therefore, striking a price below the retail average offers users certainty and direct benefits in their future operations.
Business consultancy Energetics reported that a well-designed PPA has the potential to save a client between 15-47% of the energy component of an electricity bill, based on projected 2020 prices.
Primary PPA models
There are two PPA models – in front of the meter and behind the meter.
- Behind-the-meter: Solar infrastructure is installed on surplus land or unused space such as rooftops at the user’s property at no cost and the electricity it produces is sold to the site occupant at agreed rates.
- In front-of-the-meter: Commonly referred to as Corporate PPA’s, solar infrastructure is generally installed at an off-site location arranged by the provider. The customer purchases electricity from the solar plant at an agreed rate. The PPA provider manages all requirements through the wholesale energy market to deliver the agreed solar electricity to the customer under the PPA.
Which businesses are leading the change?
PPAs aren’t sector specific, but it has been a popular model for retail property landlords, especially at the institutional level.
Shopping centre rooftops are popular places to house behind-the-meter systems, consolidating outgoings for users at a time when their tenants are feeling the brunt of changing consumer habits.
How do we approach PPAs?
We’ve made it a priority to debunk the process for clients.
We provide transparency across key inputs that enable customers to recognise value opportunities and strike the right risk balance between the parties that optimises savings to the customer.
Roof rental is available, but as an upfront offer – it’s a myth. Roof rental is simply an additional charge that we can build into the PPA that is “repaid” to the customer as a rental. Think of it as taking your savings as income rather than offsetting cost.
As mentioned, we’re advocates of the benefits of PPAs but recognise that every business is different. Our experience in the sector has taught us the fundamentals that businesses need to make PPAs work for them.
We sit down with businesses and pore over their operations, future plans, and can clearly articulate to them the pros and cons of PPAs. We help them so they can make an objective decision on whether to commit, or not.
Many of the original PPAs were struck with 25-year timeframes. That’s a massive commitment for business. We’re flexible across terms – 7, 10, 15-year terms are common. Anything more than that is completely disparate with the payback period of the underlying system. Indeed, on systems 100kW or less – 7 – 10 years can still deliver sub-10 cent per kWh prices.
Find out if PPAs are best for you
You can only make an objective decision about whether PPAs are right for you or not by talking to a specialist. With over a decade of experience with PPAs, we’re happy to talk to you about your individual needs.
Call us today on 1300 660 704 or fill out our contact form and we’ll help you find the best solution for your business.