A Power Purchase Agreement (PPA) is an financial arrangement that allows a business to purchase renewable energy that is generated either on their premises or off-site.
The agreement is made between a business and a provider — usually but not always an energy retailer.
'Behind the meter' agreements
The model most appropriate for small and medium-sized businesses is a ‘behind the meter’ agreement, whereby a provider installs and owns a renewable energy source (for example, a rooftop solarPV] system) on the site of the business. Electricity generated is supplied solely to the business at an agreed rate.
A 'behind the meter' agreement may be a good fit if your business:
- prefers for a third party to own, install and maintain a renewable energy system;
- is seeking to access low cost electricity from renewable energy without owning a system.
- requires an energy generating system such as solar PV.
How it works
A 'behind the meter' contract is entered into by a provider and the owner or lessee of a premises (often called the ‘off-taker’).
The provider (typically funded by a bank\financier) is the owner and operator (typically outsourced to a contractor) of the system and sells electricity to the owner\lessee at an agreed per kWh rate over an agreed term.
The off-taker purchases the electricity generated from the system on-site and has an option to purchase the system at an agreed value at the end of the term.
Payments made to providers are much like regular bill payment to a utility provider – that is, based on amount of energy usage, except that the rate is set over a defined period.
Agreements can be used for any type of property and is not limited to property owners. A lessee can participate provided permission is sought.
A typical 'behind the meter' agreement can last for ten to 30 years and can include an end-of-term purchase or a renewal option.
Currently, providers for 'behind the meter' agreements in Australia consist of some of the major energy retailers and renewable energy installers. A good place to start would be to talk to your existing energy retailer and compare their offering with other retailers. To find a local installer that might offer PPAs, go to the Clean Energy Council’s list of
Advantages of PPAs
- No upfront capital or security required. As the asset is fully owned by the provider during the agreed term there is no upfront capital cost to the business
- Potential for positive cash flows. The price of the electricity from the provider is typically less than the market retail rate
- Off-balance sheet. Regular payments are treated as operating expenses like a standard energy bill.
- Prices are predictable. As electricity prices are locked-in, the business is protected from fluctuations in energy prices.
Disadvantages of PPAs
- Potentially forego incentives. Typically, the supplier will be the recipient of any tax benefits or renewable energy credits generated
- No guarantee of output. Typically, the supplier will not guarantee electricity output, hence connection to the grid is still essential
- Contract complexity. PPAs can have contractual requirements that may be more lengthy and complex than those involved in the outright purchase of a system
- Risk of over-payment. The business may risk paying a higher rate than the market rate should retail prices decline in the future.
Corporate PPAs involve purchasing renewable energy from external sites — usually large-scale solar and wind farms — and can be ideal for large businesses looking to secure a sustainable and renewable energy supply. For more information visit the Business Renewables Centre website.
For further information on how businesses can save on energy costs visit the Victorian Energy Saver website.