- Kevin Pratt
- 1 day ago
- 6 min read
Businesses and organizations increasingly turn to renewable energy to reduce operational costs, achieve sustainability goals, and secure long-term energy price stability. One of the most popular ways to procure renewable energy is through a long-term Power Purchase Agreement (PPA).
For many companies, entering a PPA can provide significant financial and environmental benefits. However, not every business is in a position to enter such an agreement. Before committing to a long-term PPA, companies must assess various factors to determine whether it is viable.
This blog guides you through the key considerations and steps to assess whether entering a long-term PPA is right for your business.
Understand the Basics of a Power Purchase Agreement (PPA)
A PPA is a long-term contract between a business and an energy provider, typically for solar, wind, or other renewable energy sources, in which the business agrees to purchase power from the provider at a fixed price for a specified period—usually 15 to 25 years. The agreement includes the provider's construction, operation, and maintenance of the renewable energy system, usually solar or wind, while the business purchases the energy generated from the system. The energy is either consumed on-site or delivered to the microgrid.
A PPA allows businesses to secure clean, renewable energy without the upfront capital expense and risks associated with system ownership.
Evaluate Your Energy Usage and Demand Profile
When assessing whether a long-term Power Purchase Agreement is right for your business, the first and most important consideration is your energy consumption and demand profile. Businesses that use a substantial amount of electricity throughout the day are typically better suited to benefit from a PPA because they can take full advantage of the renewable energy generated by the system.
Key Questions to Ask About Your Energy Usage
How much electricity does your business consume daily, monthly, and annually?
Are your energy needs relatively constant, or do they fluctuate throughout the day or year?
Do you have peak energy demand periods that would benefit from solar or wind energy generation?
Understanding your energy consumption will help determine whether the energy generated by the renewable energy system will be enough to meet your needs. Suppose your energy usage is too low or highly variable. In that case, you might not benefit as much from a long-term Power Purchase Agreement, as the system may not generate enough energy to offset your total energy costs.
A PPA can offer a predictable cost structure and lower energy prices over time for businesses with high and consistent energy needs.
Assess Your Location and Solar Resources
Another crucial factor to evaluate is whether your business is located in an area with favorable conditions for renewable energy generation, especially for solar or wind power. Renewable energy systems are most effective in regions with consistent sunlight or wind patterns.
For solar power:
Is your location sunny enough to make solar energy generation viable?
Does your property have the necessary space for a solar installation, or can you access nearby land for solar arrays?
A solar PPA may not be as cost-effective or efficient if you live in a region with limited sunlight. To understand the potential benefits and limitations, it's essential to perform a detailed energy resource assessment.
Many renewable energy providers will conduct feasibility studies to assess your location's suitability for a PPA. This study can help determine whether the energy system would generate sufficient energy to meet your needs and if it would provide the anticipated savings.
Analyze Financial Capacity and Stability
One of the primary reasons many businesses enter into a Power Purchase Agreement is to avoid the significant upfront capital investment required for installing a renewable energy system. However, while PPAs eliminate the need for immediate capital expenditure, they involve long-term financial commitments that should be carefully considered.
Key financial factors to consider include:
Creditworthiness: Most PPA providers will require an assessment of your company’s creditworthiness to ensure that you are capable of meeting the financial obligations of the agreement. Businesses with strong financials and a good credit score are more likely to secure favorable terms for a PPA.
Payment Terms: Evaluate the terms of the agreement to determine whether the fixed energy pricing offered through a PPA aligns with your business’s financial capacity. PPAs typically last between 15 and 25 years, which means your business must be able to handle the fixed energy costs over a long period, even if there are fluctuations in energy demand or market conditions.
Potential Savings: Assess the financial benefits, such as the potential savings over the term of the agreement. Compare the PPA pricing to the current energy rates you are paying. In many cases, PPAs offer savings of 10-30% or more compared to utility electricity prices, but the exact amount depends on various factors, including energy consumption, location, and the specifics of the PPA.
Ensure you have a clear understanding of the total cost over the term of the PPA and any potential hidden costs, such as maintenance fees, escalation clauses, and penalties for early termination.
Review the Length of the PPA Contract
One of the defining features of a PPA is its long-term nature. A typical PPA contract lasts anywhere from 15 to 25 years. While this provides long-term price stability and cost savings, it also means your business will be locked into the agreement for an extended period.
Before entering into a PPA, ask yourself the following questions:
How likely is my business to remain at the same location for the duration of the PPA?
Does my business plan to grow or change significantly in the coming years, potentially altering its energy needs?
What happens if I want to sell the property or exit the agreement early?
If there’s any uncertainty about the future direction of your business or its location, a long-term contract may not be ideal. Some PPAs may offer exit clauses or provisions for early termination, but these can come with significant penalties or additional costs.
On the other hand, if you anticipate stability and long-term growth, a long-term PPA could offer substantial financial benefits and help you meet your sustainability goals.
Evaluate the Risk of Future Energy Price Increases
Another important consideration is the potential for future increases in electricity rates from your local utility. If your business is located in an area where energy prices are expected to rise significantly over the next few years, a PPA can provide a hedge against these price hikes by locking in lower, fixed rates for the duration of the contract.
In areas with volatile energy prices, PPAs can provide peace of mind by ensuring that energy costs remain stable and predictable, even as utility prices fluctuate. However, in regions with stable or low energy rates, the savings from a PPA may be less significant.
Understand Regulatory and Incentive Policies
Government policies and incentives are another key factor to assess when considering a PPA. Many regions offer financial incentives, rebates, and tax credits to businesses that adopt renewable energy. These incentives can significantly reduce the overall cost of the energy system and improve the financial viability of the PPA.
Consider the following:
Federal and State Incentives: Look into available federal, state, and local incentives for renewable energy, such as the Investment Tax Credit (ITC) in the United States, which provides a tax credit for businesses that install solar systems.
Renewable Energy Policies: Check whether there are any renewable energy mandates or targets in your region that could affect your business’s energy procurement options or the terms of a PPA.
Understanding these policies can help you identify additional cost savings and determine if a PPA aligns with the regulatory framework in your area.
Consult With Experts
Finally, seeking professional guidance before committing to a PPA is essential. Energy consultants, legal advisors, and financial experts can help you evaluate the potential benefits and risks of entering a long-term PPA. They can assist in analyzing your energy needs, reviewing the terms of the contract, and ensuring that the PPA aligns with your business objectives.
Improve Energy Efficiency With a Long-Term Power Purchase Agreement
Pacifico Power helps businesses improve energy efficiency by offering long-term Power Purchase Agreements that provide access to affordable, renewable energy without the upfront costs. Through these agreements, businesses can lock in stable, predictable energy rates, reduce their reliance on the grid, and lower overall energy consumption, all while meeting sustainability goals and enhancing long-term operational efficiency. Contact us today to learn more about our solar technology.
