This article was first published on 18 August 2020 and last updated on 12 February 2021 to include additional details.
What is a solar PPA or solar leasing?
Purchasing and installing solar panels upfront, especially for large buildings, can incur a significant cost for building owners. With alternative financing arrangements like solar PPA or solar leasing, building owners are able to enjoy the benefits of solar with little to no upfront investment.
A solar PPA (Power Purchase Agreement) is a type of solar financing arrangement where a property owner does not have to pay for upfront costs of a solar PV system. The property owner agrees to loan out the building’s rooftop for a solar energy developer to own, operate and maintain the solar panels and system, and in return, is entitled to purchase the solar system’s electricity output, often at a 15-30% discount from prevailing electricity prices. This is usually a long-term contract of about 20 years, and in Singapore is also sometimes referred to as “solar leasing”.
A solar PPA is often applicable for commercial or industrial buildings with a rooftop solar potential of at least 300 kWp (roughly a rooftop area of 3,000 sqm) and more than 15 years remaining in their lease term.
How does a solar PPA work?
While the terms of a solar PPA vary based on several factors such as the solar developer, the building’s rooftop solar potential and local regulations, here are some common terms building owners can expect:
- Discounted solar electricity: at a fixed rate structure or at a discounted percentage rate to the market, with effective discount rates of 15% to 30% from prevailing electricity prices
- 15 to 20 years contract duration; however as the cost of solar continues to decline, minimum contract durations have also been reducing over time
- Solar PV assets owned by developer: the solar energy company pays for upfront capital expenditure to own the rooftop solar asset, as well as pays for ongoing maintenance costs to ensure the solar system is performing well
What are the benefits of a solar PPA?
- Zero upfront capital cost to benefit from solar energy
- Immediate cost savings with lower cost of solar electricity
- More predictable energy pricing with ability to lock-in fixed electricity prices to protect against unpredictable wholesale energy prices
- Limited risks from owning and operating an energy asset by only paying for solar energy generated
- No ongoing operational costs with solar developers managing and paying for the maintenance of solar panels
- Increase in property value
- Reduce carbon footprint in the switch to clean energy
How much can you save with a solar PPA?
To put this into context, let’s walk through an example.
Let’s say you own a cold storage facility which uses around 120 MWh of electricity every month, and the current tariff rate you are paying for electricity is $0.15 per kWh. This adds up to an electricity bill of $18,000 per month.
Let’s assume you can install a 500 kWp solar PV system on your roof and the system generates around 55 MWh of solar electricity per month. If you sign an agreement with a PPA price of $0.10 per kWh (a 33% discount) of solar energy, every month, you will be paying $5,500 on the first 55 MWh of your energy consumption generated from the solar panels, and $9,750 on the remaining 65 MWh of electricity which you will continue to draw from the grid. This gives you a total electricity bill of $15,250 with a $2,750 monthly savings.
That said, while there are clear benefits to a solar PPA, the long term savings you get with a PPA are often substantially lower compared to an upfront purchase of a solar PV system. You can save more in the longer term by owning the solar system as any solar energy generated can directly offset your electricity bills.
In Singapore, solar owners can also receive financial benefits through payment schemes for excess solar electricity generated or by selling Renewable Energy Certificates (RECs). In a solar PPA or leasing arrangement, these benefits are enjoyed by the solar developers, and may not always be passed on to you.
Renewable Energy Certificates (RECs)
Renewable energy certificates, or RECs in short, are tradable assets which represent green electricity that is generated by renewable energy sources. Similar to the concept of carbon emissions trading, RECs allow companies to purchase certificates to offset their carbon emissions and access green energy sources, often to meet their carbon targets.
The bottom line: solar PPAs allow you to benefit from immediate cost savings on solar, yet not have to fork out upfront capital to own a solar system on your roof. This is suitable if you may not have the upfront capital to purchase solar, or do not wish to own and operate a solar energy asset. However, if your aim is to maximize financial returns in the longer term, owning the solar system may provide you with higher long term cost savings.
Want to compare these two options for yourself? Our online solar assessment tool allows you to get a personalised cost savings estimation of both a solar PPA and upfront purchase offer for your commercial and industrial properties, in just a few clicks. Try it out now.