Power Purchase Agreement (PPA)
A Power Purchase Agreement (PPA) is a financial arrangement in which a solar developer (seller) installs, owns, and operates a solar PV system on a host customer's property, and the host customer (buyer) agrees to purchase the electricity generated by the system at a predetermined rate (per kWh) for the duration of the contract.
PPAs allow commercial and industrial customers to benefit from solar energy with no upfront capital investment, while the solar developer captures the tax benefits (ITC, MACRS depreciation) that make the economics work.
How PPAs Work
- Developer finances and installs the system on the host's roof or land
- Host buys electricity at a fixed rate ($/kWh), typically below the local utility retail rate
- Developer earns revenue from electricity sales and may also receive RECs (Renewable Energy Certificates)
- Contract term: Typically 15–25 years
- Escalator: PPA rates often include an annual price escalator of 1–3%
At contract end, the host typically can purchase the system at fair market value, renew the PPA, or have the developer remove the system.
PPA vs. Direct Ownership
Direct ownership (loan or cash): Host owns system, captures all tax benefits (if applicable), retains all production. Higher long-term savings, but requires capital or financing.
PPA: No capital required, predictable electricity cost, no O&M responsibility. Developer retains tax benefits and RECs. Long-term savings less than ownership.
PPAs are most common for commercial, industrial, and utility-scale projects where the tax equity structure is valuable. Residential PPAs exist but have declined in favor of solar loans.