In a Power Purchase Agreement (PPA), a third-party developer installs, owns, and operates a renewable energy system with financing from a third-party investor. In a PPA with an onsite project, the property owner (customer) buys the electricity produced by the renewable energy project at a pre-determined rate (either a fixed or an escalator rate, which goes up over time) for a set duration (typically between 15 and 20 years). The customer does not need to make the up-front capital costs of developing the project. The PPA terms specify who owns the energy attributes or renewable energy certificates (RECs) generated by the renewable energy system. The PPA may also contain terms for the retirement of the RECs, which either the buyer or the third party can do on behalf of the buyer, who can claim that the electricity is renewable.
A PPA with an offsite project provides an alternative approach, where the customer and the renewable energy project do not have to be co-located if they both reside within a competitive retail market where consumers can pick who generates their electricity or in a state that authorizes third-party agreements.
For any PPA, applicable federal tax credits for renewable projects stay with the developer and usually result in lower energy prices for the end-user. Third-party lenders can monetize available tax incentives that low- and moderate-income (LMI) customers, nonprofits, or governments are unable to use. 1
PPAs with either onsite or offsite projects can be referred to as physical PPAs because in either case the buyer will take delivery of the physical electricity generated. 2 For onsite PPAs, electricity will be delivered behind the buyer’s meter; for offsite PPAs, it will be delivered at some pre-determined point on the grid. In addition to agreements for energy provision, customers can enter into agreements with third-party developers to acquire the RECs as well. 3
PPAs can be structured in many ways to shift or mitigate risks for the parties involved. For example, one way of structuring a PPA is with a prepaid PPA. In this arrangement, the customer pays the total discounted cost of the full PPA up front, with no payments made during the term of the agreement. The financier assumes no credit risk because the customer makes all payments in advance. Since this structure shifts risk onto the buyer, it would likely offer favorable PPA terms for the buyer of the power. Prepaid PPAs are available for commercial and small-scale utility projects. However, the uptake of the prepaid option has been minimal compared to the other forms of PPAs.
As of 2017, a combined 2.78 GW of capacity was developed through PPAs, with most deals concentrated in the IT sector. 4,5,6 According to the Database of State Incentives for Renewables & Efficiency, as of June 2019, PPAs are available in 28 states plus Washington, D.C. 7
Typically, state governments enact enabling legislation or regulations, and then the utility or third party implements the program. Depending on the utility type and authorization in the local jurisdiction, utilities, such as cooperatives, may be able to voluntarily implement CSS programs without any new legislation. A local government can support efforts to pass enabling legislation or regulation where it is needed and may also directly subscribe to a CSS project in their jurisdiction.
States across the United States have adopted the CSS model quickly. In 2010, CSS accounted for just 0.01% of total operating solar energy nationally. Between 2013 and 2017, CSS deployments experienced a compound annual growth rate of over 50%. Nineteen states and the District of Columbia (DC) have enabling legislation for CSS, and 41 states plus DC had at least one operational CSS project as of the third quarter of2022. Over 5,300 megawatts of CSS were installed nationwide through 2022, driven by enabling policies, incentives, and innovative business models. Key barriers to additional uptake stem from a lack of enabling policy, initial program design, and overall market maturity.
Here are the typical characteristics of power purchase agreements.
| Program types | Physical PPA; prepaid PPA |
| Target sectors | Commercial; Industrial; Residential: Homeowners; Residential: Multifamily; Public; Nonprofit |
| Potential funding sources | Private investors/lenders |
| Security required of borrower | Uniform Commercial Code filing to protect lender in case of borrower default |
| Repayment mechanism | Varies based on contract; common arrangement is monthly payments to lessor or PPA provider; prepaid is an alternative |
| Funding needs | Developer (borrow) may not need any up-front capital; lender needs to provide significant capital for development |
| Enabling legislation requirement | Required for physical PPAs |
When developing a financial program to overcome up-front cost barriers, considering the needs of underserved communities early in the process can help decisionmakers create a comprehensive program and incorporate consumer protections. Decisionmakers can evaluate how and to what extent marginalized communities and considerations of equity have been included in the policymaking process for developing a program by considering the following questions: 14
Many of the financing programs covered in this Clean Energy Financing Toolkit for Decisionmakers can provide specific benefits to underserved communities through increasing access to clean energy (e.g., lower energy bills, upgraded equipment, improved comfort). However, financing programs that place additional debt on consumers could place LMI households at an increased risk if adequate consumer protections are not in place. For example, consumers could face penalties for failing to repay program funds, including having their power shut off, receiving adverse credit scores, and in some instances losing their homes. Additionally, physical PPAs are often not an option for LMI customers who do not own their own home or otherwise do not have a property that is appropriate for a renewable energy installation. Decisionmakers can implement consumer protection frameworks to address these concerns, including increasing awareness, analyzing the applicant’s ability to pay, and requiring disclosure of financing costs. Considerations for consumer protections are specific to each program.
Some PPAs may be supplemented with financing specifically for LMI borrowers such as credit enhancements. The PPAs that have terms of 15-20 years are generally not flexible enough for individual LMI customers. In addition, PPAs often require customers to demonstrate that they have good credit to qualify. Community shared solar may offer a better option for LMI customers, although many community shared solar projects do not convey the associated RECs to project participants or sponsors.
PPAs are typically administered by third-party developers on behalf of public or private clients. These third parties are responsible for developing the PPA contract and associated materials, identifying third-party investors, working with lenders to secure the required capital investment, and installing the renewable energy system. After installation, the developer is responsible for maintaining and operating the system. In addition, the developer is responsible for billing clients and collecting monthly payments.
Both state and local governments can enter into PPAs themselves, but the existing regulations covering retail choice and electricity franchises may dictate the type of PPA. However, if a state does not currently authorize PPAs, then state legislators, public utility commissions, or state incentive program rulings would need to establish the ability through appropriate enabling legislation and regulations for utilities. Governments can provide a consumer protection framework for PPAs through legislation. State and local governments can also advertise the availability of PPAs to target sectors.
Utilities utilize PPAs, but they play a more limited role in implementing a PPA program. Utilities are responsible for overseeing the project interconnection to the grid, and they can provide guidance to clean energy developers, particularly in areas where PPAs are more common. In other instances, depending on the project's size, utilities may require an interconnection study. This requirement can affect the timing of interconnection.
State and local governments should consider these steps and best practices to utilize and foster the use of PPAs within their jurisdiction:
2 Physical PPAs are distinguished from virtual PPAs, often called a “contract for differences.” EPA regards a virtual PPA as a “financial instrument,” not a power purchase contract as the name suggests, because the buyer never takes delivery of the power generated. Instead, a virtual PPA is a sophisticated contract suited for high-load customers and often used as a hedge instrument. Virtual PPAs are regulated by the Securities and Exchange Commission.
3 There are many important aspects of renewable energy certificates for governments to consider, such as location and vintage. Learn more about RECs by reading EPA’s primer.
5 Feldman, David, Vignesh Ramasamy, Ran Fu, Ashwin Ramdas, Jal Desai, and Robert Margolis. 2021, January. U.S. Solar Photovoltaic System and Energy Storage Cost Benchmark: Q1 2020. National Renewable Energy Laboratory (NREL).
6 These capacity figures do not indicate whether the buyers received the associated project RECs in order to claim to be using renewable electricity. However, it is believed that most buyers choose to receive RECs as part of their PPA contracts to credibly meet renewable energy and greenhouse gas reduction targets. In the United States, buyers that do not receive the REC cannot claim sale of or usage of renewable electricity from that project.
7 Database of State Incentives for Renewables & Efficiency (DSIRE). 2019, June. 3rd Party Solar PV Power Purchase Agreement (PPA). Map.
8 The average residential and commercial solar systems are 7 kW and 200 kW, respectively. Generally, utility-scale systems range from approximately 5 MW to 100 MW but may be larger. Feldman, David, Vignesh Ramasamy, Ran Fu, Ashwin Ramdas, Jal Desai, and Robert Margolis. 2021, January. U.S. Solar Photovoltaic System and Energy Storage Cost Benchmark: Q1 2020. National Renewable Energy Laboratory (NREL).
14 Governments, agencies, and nonprofits have developed equity lenses and frameworks to ensure that issues of race and equity are incorporated throughout policy-making processes. These questions draw from the following frameworks: Institute for Energy Justice, “Section 2 – Energy Justice Scorecard”; City of Seattle, “Racial Equity Toolkit”; and Higher Education Coordinating Commission, “Oregon Equity Lens.”