Power Purchase Agreement

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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
Revenue streams: 
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
Credits (SRECs)
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).