What is a Power Purchase Agreement?
A power purchase agreement is a private sector incentive mechanism provided by the installer or developer to the customers for the installation of a renewable energy generation system.
How Does It Work?
You want to set up a solar installation over your rooftop but you don’t want to pay the upfront sticker price for purchasing the solar panels, balance of systems and installing it. Not everybody has the money to put a couple of solar panels on the roof. In this scenario, you ink an agreement with an installer who is willing to install the solar plant for free under the condition that you pay a fixed price for the electricity that is produced for 5, 10, 20 years. The installer loans money from bank to finance the solar panels that are set up on your roof.
But understand that this price of electricity that is charged by the installer may be higher than the current electricity prices but it will be less than the price of electricity after a couple of years when the electricity price increases due to inflation. So, in essence, you bet against an increase in electricity prices. Hence it acts as an effective risk mitigation strategy.
Power Purchase Agreement Benefits
Based on the above, therefore, the benefits of PPA can be summarised as follows:
- Reduced risk from the customer point of view
- Projected decrease in electricity prices over the long-term
- Installer’s advantage in availing tax benefits
- Absence of any upfront payment by the customer