Power Purchase Agreement
What is a PPA?
A power purchase agreement is a contractual relationship between a homeowner and a for-profit entity (usually an LLC) that allows the homeowner to have a solar system on their home without paying the upfront cost of the system. This model takes advantage of financial incentives that are available to for-profit entities but not to households with low income. This agreement provides four streams of revenue for the for-profit entity that make it a desirable venture.
How does it work?
In this financing model, the homeowner would still have a monthly electric bill (to pay for the solar energy), but it would be paid to the LLC through a Power Purchase Agreement (PPA). The LLC owns the solar system for 8-10 years. At the end of this period, ownership of the solar system would be transferred to the homeowner at a nominal price.
Example of a 4 kW solar system
|Retail cost of system||$9000|
|26% tax credit on the installed cost of the system||$2340|
|Decrease in federal and state taxes due to |
depreciation (87% depreciation times federal tax
rate of 37%)
|Net income generated by solar energy sold to customer |
(after federal and state taxes)
|Net (after-tax) income from Solar Renewable Energy |
|Net (after-tax) proceeds for LLC||$759|
Multiple factors can be adjusted to come up with a mutually desirable agreement for the homeowners as well as the LLC.
- Solar system size
- Number of years for PPA payoff
- Electricity rate for solar usage (per kWh) and potential increase in rate
- Assumed years for LLC to sell SRECs
Note: This material has been developed in consultation with Ruth Amundsen (Norfolk Solar LLC).