SUMMARY
POWER PURCHASE AGREEMENT
PPA PARTICIPANTS
PPA TERMS
FINANCING
SUMMARY
Sedona Solar Solutions is a Solar Services Provider, an integrator of solar services functioning as a hub for all solar participants: owner, investor, host, utility, equipment manufacturer and installer.
Sedona Solar Solutions is based on the Solar PPA model for Distributed Generation projects where the site host does not own the solar system and buys the electricity from the owner of the system through a Power Purchase Agreement (PPA).
The PPA is based on electricity produced by the system. It can vary in duration from 10 to 20 years with buyout options. The electricity is purchased by the user at a lower rate than utilities rate over time with a favorable escalation clause.
Sedona Solar Solutions is the owner of the solar system with the tax investor.
Sedona Solar Solutions targets the Distributed Generation solar market: commercial centers, manufacturing facilities, office buildings, auto dealerships, warehouses, wineries, schools, hospitals, residential cooperatives and public entities in Arizona and the South-West.
THE PPA MODEL
The Solar Power Purchase Agreement (SPPA) is an alternative to financing and owning the system. It offers you an opportunity to install solar power at your facility without paying upfront costs or worrying about system operation and maintenance.
Sometimes referred to as a “third party” ownership model, this approach lets you focus on your core mission, while solar experts manage your energy system.
For 10 to 20 years, you enjoy predictable, pre-set electricity prices, and power from a solar system that is a source of pride for your organization.
Power purchase agreements are a well-established contract mechanism. Many large businesses, such as Kohl’s, JCPenny and WalMart department stores, and institutions, such as airports and water districts, use these agreements for buying solar electricity.
The PPA model has increasingly become the established standard for commercial owners to pay for on-site green power with a yearly growth of over 30%.
The SPPA structure
Your organization contracts with a solar services provider that is responsible for financing, designing, installing, monitoring, and maintaining your project. You do not pay for the installation, but instead buy the electricity the system generates. You make your payments to the solar services provider for the electricity the solar system produces, just as you now pay your utility for electricity from large central power plants.
You determine the level of payment in advance, so you know what your power costs will be over the life of the SPPA contract, usually 10 to 20 years. In this way, SPPAs offer very different terms than utilities.
With the permission of regulators, your utility increases your electricity rates at any time. Many believe that electricity rates will rise significantly as climate change legislation is adopted because most electricity in the U.S. is produced from carbon-intensive fuels, such as coal and natural gas. So it is difficult to predict your future energy costs when you buy power from a utility. SPPA contracts avoid unexpected price fluctuations because the cost of the fuel is known: sunshine is always free.
THE PPA PARTICIPANTS
Four entities play a role in your contract agreement, either directly or indirectly. To help you understand how this method works, here we outline who they are and what they do.
Solar Services Provider (SSP):
This is the project coordinator, the company that you will hire to make your project happen. An expert in financing with strong connections to investors, the SSP knows about installation and monitoring of equipment, and completes your project on time and within budget. The SSP contracts with a system installer who works with you on system design, equipment, metering, and production monitoring and maintenance.
The provider tries to keep transaction costs to a minimum for the entire project so he can offer you a competitive electricity price and his investors a reasonable rate of return. With that goal, the solar services provider will offer your organization a “standard offer” agreement that describes the most common terms for your type of organization.
Most solar services providers are technology neutral and work with various manufacturers. The SSP will make a priority of using the right equipment for the job.
Investor and Special Purpose Entity:
The solar services provider engages financing partners. A lender will fund the construction of the solar system. The investor provides equity financing and receives the federal and state tax benefits (called “tax equity” investing). You may not work directly with the financing partners, but it is useful to understand their requirements and relationships to ensure your project has solid financial backing.
The investors and solar services provider form a special purpose entity to own the solar electricity system and allocate tax credits and other benefits and risks. The solar services provider works with stable lending and investment partners, who in turn are eager to work with host customers that have a strong credit rating.
Host customer:
As host customer, you agree to install the solar electricity system on your property, work with the solar services provider to enable efficient project installation, pay for all of the electricity the system produces at the negotiated rate, and provide access to the system for monitoring and maintenance. You may purchase the system at fair market value when or before the contract ends. In some cases this may be as soon as six years after the system was installed.
Utility:
The utility and its treatment of solar electricity is an important factor in the project, especially given that the solar equipment may, at times, produce more power than what is being used on-site. Utility policy will affect project timing and whether or not you purchase the system at the end.
Your relationship with the utility company includes interconnection agreements, net metering, incentives, peak demand and demand charges (Time-of-use Tariff or TOU).
Summary
The solar power purchase agreement is becoming a very popular option for buying solar electricity in the U.S. In this model a project developer, known as the solar services provider, brings an investor and host customer together to install a PV system on the host’s site. The PV electricity reduces the amount of electricity that must be purchased from the local utility. The utility supports the project by connecting the solar equipment to the grid and providing credit for any solar power sent back through the meter to the grid.
THE PPA TERMS
1- Term
Base term with one or more extensions option.
The term may vary from 10 to 20 years.
2- Effective Date
The PPA becomes binding from the date it is signed.
This ensures that the purchaser will buy the output once the project is built and that the project owner will build the project and not sell its output to anyone other than the purchaser.
3- Commercial Operation Date
The term usually begins on the commercial operation date and extends for a specified number of years.
The commercial operation date can effectively be the date on which the installation is “finished” except for relatively minor punch-list items.
4- Contract Rate
The rate is fixed for the duration of the agreement with an escalation clause reflecting inflation and the projected rise of electricity from utilities.
The rate is designed to create significant savings for the consumer over the duration of the agreement.
5- Environmental Attributes
The environmental attributes will attach and be available to the solar power project during the term of the PPA.
The PPA usually states the energy is sold without the environmental attributes.
The sale of Renewable Energy Certificates is the prerogative of the owner of the system unless the PPA states otherwise.
If the host wishes to retain the right to the environmental attributes, the seller will warrant title to the attributes but will not warrant the current or future use, character, or value of the attributes, or whether and to what extent they will be recognized by law.
6- Permitting & Development
The PPA will include a clause for permitting, status reports, milestones and possible damages for delays.
7- Interconnection
The PPA usually requires the seller to bear the cost of interconnection.
8- Operation & Maintenance
The PPA outlines the seller’s responsibility to operate and maintain the project in accordance with prudent operating practices. Such duties include regular inspection and repair, as well as completion of scheduled maintenance.
The PPA also provides for access to the project.
9- Net Metering
Metering is most important as it determines the quantity of output for which the seller is paid.
Under Arizona law, net metering allows the consumer to receive credits for excess electricity produced.
The PPA assigns those credits to the seller.
10- Billing & Payment
The PPA determines how invoices are prepared, when they are issued, and how quickly they are paid.
The PPA sets forth procedures for raising and resolving billing disputes, and the interest rate and penalties that apply to late payments
FINANCING
FINANCING STRUCTURES
In the distributed solar energy industry, the current model for optimized financing of such projects is the combination of a power purchase agreement for the sale of energy to a retail customer, and an investment vehicle owning the solar energy facility, in which a tax motivated investor makes its investment. This model permits a solar developer to deliver green energy to a customer at a price the customer finds attractive and which reflects the monetization of the tax benefits by the investor.
1- DISPROPORTIONATE ALLOCATION PARTNERSHIP:
The solar facility is owned by a partnership or limited liability company in which the developer and the investor are partners, and in which the investor makes its investment. The investor receives a disproportionate allocation of the income and loss (including tax benefits) until a target rate of return is achieved, after
which the allocations "flip" to a ratio more favorable to the developer.
The developer has an option to buy out the investor's interest for fair market value,
determined when the option is exercised.
The advantages of a partnership structure include:
The investor residual value of five percent is significantly less than a lease residual interest.
- The developer will have a cheaper purchase option at the time it is to be exercised.
- A partnership arguably has less default risk than in a lease because there is no fixed rent schedule.
- Typically a partnership is less document-intensive than a lease transaction.
- A partnership can provide greater visibility of the tax investor"s return.
- The investor may not always require an appraisal of the project.
2- LEASE AGREEMENT:
In the lease structure the solar energy facility is sold by the developer to an investment vehicle that either leases the facility directly to the ultimate customer or to a lessee entity, which in turn has a power purchase agreement with the customer. The lessee makes lease payments for the use of the facility, and either keeps the benefits of the electricity or sells the electricity under a power purchase agreement to a third party.
The lease is typically a net, "hell-or-highwater" lease, whereby the lessee is obligated to pay fixed rent (or specified termination value in the event of a loss of
the assets) to the lessor for the term of the lease, irrespective of the actual performance of the facility, existence of force majeure events, etc. Lease rules require that the lease term not exceed a specified portion of the useful life of
the asset and that the residual value be in the range of 20 percent or greater. At the end of the lease term, the lessor becomes the sole owner of the facility, but the lessee is given an option to purchase the relevant assets at the end of the term (and sometimes at one or more specified times before the end of the term) at fair market value at the time.
The advantages of a lease structure include the following:
- The sale/leaseback transaction can be closed within
three months after the facility being placed in service, whereas a partnership transaction must be closed before the
facility is placed in service.
- Financing is available at full value.
- Fixed rent and the ability to stretch out the term of the lease result in the lessee being immediately able to keep the
upside if the project generates greater returns than is anticipated.
- Tax guidance for leasing is generally thought to be clearer and results in greater tax certainty.
The disadvantages of a lease include: - The lessee"s purchase option is more expensive than in a partnership
structure.
- The developer is required to make scheduled rent payments and comply with extensive covenants.
- The developer may not have visibility with respect to the tax investor"s return.
- Leasing deals have traditionally been document- and time-intensive.
- An appraisal is almost always required for each project.
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