What are solar Power Purchase Agreements?

• PPAs are a contractual agreement between energy suppliers and buyers
• The cost of PPAs went down significantly in the first quarter of 2024
• There are seven different types of PPAs
• PPAs can help make renewable energy more accessible to homeowners

A Power Purchase Agreement (PPA) is a contractual agreement between energy suppliers and buyers which makes it feasible for buyers to invest in renewable energy, thereby reducing the amount of power generated from fossil fuels. 

With the UK’s net-zero emissions goal by 2050, it’s more important than ever to invest in renewable energy. However, the reality is many struggle with the costs, which is where PPAs can help. 

In this guide, we run through the different PPAs available on the market, how they work when installing solar panels, as well as the pros and cons of using one.  

What are PPAs?

As mentioned, a PPA is a contractual agreement between energy suppliers and buyers – and sometimes a third party, depending on the type of PPA. They come together to buy and sell a certain amount of energy  from renewable sources. 

PPAs are usually signed for 10-25 years. Prices negotiated as part of a PPA vary, but according to an April 2024 report by LevelTen Energy, they declined 5% across Europe in the first quarter of 2024. 

“Solar P25 PPA prices dropped 5.9% and wind prices dropped 4.3% as the PPA market continued to respond to subdued wholesale electricity prices across Europe – with lower costs in the solar supply chain and a stabilising regulatory landscape contributing as well,” said Plácido Ostos, Director, European Energy Analytics at LevelTen Energy. 

“Following years of turbulence and rising PPA prices, Europe’s energy markets seem to finally be reaching a period of relative stability, with even a light downward trend.” 

Overall, there are seven different types of PPAs, all of which differ depending on your individual energy needs and financial situations. 

However, to really benefit from PPAs, you will need a sufficiently large and consistent demand for solar PV electricity and a suitable location. 

How do solar PPAs work?

The producer or business arranges the design of a solar PPA, according to Solar Energy UK, before gaining the necessary permissions and managing the installation of a solar PV system on the customer’s property at little or no cost. 

“While under contract, the customer receives a significantly reduced electricity tariff, offsetting the costs from their utility provider, while the developer receives income from the sale of the generated electricity,” the supplier said. 

The PPA will lay out the characteristics of the agreement, including negotiated prices and the amount of electricity you need supplied. 

When the contract comes to an end, you can choose to remove the system, extend the PPA or purchase the energy system. 

It’s also worth noting that your solar power will be generated in exactly the same way as it would be if you bought it without a PPA – the difference is in how you pay for it. The exact PPA process will likely differ depending on which supplier you go with. 

What are the benefits of PPAs?

PPAs can be a more cost-effective option for you to install solar panels, and there’s also additional benefits, too: 

• No upfront costs – With a PPA, there are no upfront costs to install solar panels, as you’re installing them on a lease. This option could save you up to £10,000.  
• Cheaper rates – Businesses work hard to negotiate prices on renewable energy, so it’s likely you’ll pay less rates than if you installed them with a PPA. 
• Maintenance is low – Depending on your PPA, you won’t need to worry about maintenance and insurance, as this will be covered by the company you partner with.
• Home value increase – Installing solar panels can help increase the value of your home. What’s more, any PPA you have can be transferred to the new occupants if you decide to sell. 
• Flexible options – When you reach the end of your PPA, there are flexible options for ownership to either sign a new agreement or buy the solar panel system you’ve installed. 

What are the cons of PPAs?

Like most things, there are drawbacks to having a PPA: 

• PPAs are complex – Like most legal documents, PPAs are long and use complex language. The process can also take a long time. 
• Penalties – PPA contracts can incorporate quite stiff penalties if you need to cancel the PPA before the contract ends. 
• Control – Homeowners can have little-to-no control on the materials they install, but this is dependent on the aforementioned PPAs, requirements and the companies you work with. 
• Selling issues – While you can transfer your PPA to new occupants if you sell your home, the new occupants must first agree to it. If they aren’t interested, it can be a struggle to sell your home. 
• Variable rates – While businesses will negotiate lower pricing, you will likely be on a variable rate over a fixed one, meaning you’re vulnerable to other price increases. 

Who are PPAs for? 

Homeowners can utilise PPAs to help install solar energy, as can businesses. In fact, some PPAs are more geared towards businesses. 

It’s safe to say that solar and all types of renewable energy is an investment and most will need a third-party funding source. This could be grants from the government or a loan from the bank, or credit and financing providers. If you go down the third-party route, it’s likely you’ll need to provide some security. 

This is where a solar or wind PPA comes in, as they provide that assurance. The reason for this being that it proves your commitment to paying a fixed price per megawatt hour long-term for the electricity generated from your solar panels.

What kinds of solar PPAs are there? 

There are seven kinds of PPAs and the right one will depend on what you need. We’ll go into more detail in which one below, but the different PPAs available are: 

• On-site PPA
• Off-site PPA
• Sleeved PPA
• Physical Delivery PPA
• Portfolio PPA
• Block Delivery PPA
• Virtual PPA

On-site PPAs

On-site solar PV generation can take the form of either large-scale rooftop installation on a commercial or industrial site, according to Solar Energy UK, or on a ground-mount installation on adjacent land. 

“It is also possible for C&I energy consumers to contract directly with a nearby renewable generator via a private wire arrangement,” its website said. “But these arrangements are more complex and remain relatively rare. By their very nature, on-site PPA structures are location and situation specific”. 

To be successful, most on-site PPAs with solar PV should cover the following: 

• The consumers electricity demand must be sufficiently large, consistent and time-matched for solar PV
• A suitable location must be available to host site on-site or near the site. At least 1sq metre space would be needed per kW of solar PV energy, but this will vary
• An affordable connection to the local distribution grid
• You’ll need to undergo credit checks and be deemed credit-work to facilitate any financing

Off-site PPAs

Off-site PPAs allow businesses to access renewable energy from external projects located off premises and you’re able to connect to the largest solar farms across the UK. 

This type of PPA offers businesses flexibility and scalability in meeting renewable energy companies or utilities providers. 

Choosing an off-site PPA can enable your business to enter into a long-term contract for solar energy, without the need for too much installation disruption. 

Sleeved PPAs

A sleeve PPA utilises a third-party intermediary, which is also known as a ‘sleeve’, to help facilitate the physical delivery of electricity from a renewable source to the buyer. 

The third-party client then helps businesses navigate regulatory complexities, which helps make sure you receive a reliable power supply from renewable sources. 

“In a sleeved PPA arrangement, the sleeve acts as a bridge between the renewable project and the buyer, managing the physical delivery of electricity, while the buyer benefits from renewable energy, without directly engaging in energy transactions,” Novergy Solar said. 

The benefit of a sleeved PPA for businesses is that it provides them with a more streamlined approach to accessing renewable energy, making for less admin on your end and making sure you meet regulations. 

Physical Delivery PPAs

With a physical delivery PPA, the clue is the name. The buyer directly receives the electricity produced by a renewable energy project. 

A physical delivery PPA offers a straightforward ownership of the power and gives businesses a clear and direct method to gain renewable energy, like solar, and integrate it into your energy portfolio. 

Choosing this PPA offers more transparency and accountability than other PPAs on the market, as it ensures you receive your expected energy output from your renewable energy projects. 

Portfolio PPAs

Portfolio PPAs offer multiple renewable energy projects to fulfil the buyer’s energy requirements, speaking energy sources across each project you’re working on. 

This also reduces overall risk. 

Combining all your projects with the portfolio PPA offers more reliability and stability in energy supply, even if there’s fluctuations. 

With a PPA, you’re able access solar, wind and hydroelectric power, offering greater flexibility, allowing you to reach your sustainability goals sooner. 

Block Delivery PPAs

Block delivery PPAs allow buyers to purchase energy in predetermined blocks, offering some flexibility on energy demands. This allows you to adjust your energy requirements to your specific needs at that moment in time. 

By utilising these blocks, you have a greater opportunity to effectively manage costs and relieve any budgeting constraints that may arise. 

This type of PPA offers a more structured approach to energy procurement, and provides transparency and predictability in energy pricing. 

Virtual PPAs

Virtual PPAs allow organisations to purchase the environmental attributes of renewable energy generation, without physically receiving the electricity. 

In essence, this enables organisations to support renewable energy projects and meet their sustainability goals, without the need for direct consumption of solar energy. This option basically offers wide environmental benefits, while helping to mitigate the risks associated with traditional energy sources. 

Most companies will need to conduct a risk assessment before signing a virtual PPA to get a better idea of your goals and risk tolerance. 

This is a good option for businesses looking to expand and grow their renewable energy usage.

Which PPA should I buy?

The type of PPA you will need will vary depending on your needs and location. For example, if you’re located in an urban area with little space, an off-site PPA will be better. 

Whereas if you’re somewhere outside a city with lots of space, an on-site PPA could be better. Whatever your location, you should consider all your options based on how much you want to spend. 

Solar PPA vs solar panel lease

A solar PPA and a solar panel lease work in very similar ways. In both cases, a solar company instals, maintains and owns the system that produces solar energy. The difference, however, is what you’ll pay. 

A PPA offers you a variable rate based on your energy usage, whereas a solar panel lease offers a fixed rate. Therefore, you need to decide which is more practical and financially viable for you. Variable rates come with risk and you could make more or less than your initial payments.   

Summary

• PPAs come together to buy and sell a certain amount of energy that is typically sourced from renewable sources. 
• Homeowners can utilise PPAs to help install solar energy, as can businesses.
• On-site solar PV generation can take the form of either large-scale rooftop installation on a commercial or industrial site.
• Off-site PPAs allow businesses to access renewable energy from external projects located off your premises.
• Most companies will need to conduct a risk assessment before signing a virtual PPA.