We are seeing more and more developers structuring deals with floating, instead of fixed, power purchase agreements (PPAs) meaning that the value of the PPA is tied to electricity rates.
Developers like to pitch floating PPAs to host customers because they guarantee a certain percentage discount from their utility prices each month. But while the host gains certainty – knowing they won’t ever pay more than retail rates for solar – the investor picks up additional risk. Because of this risk, very few solar investors will fund these projects. Yet, if they do, they will have to take a more conservative approach to underwriting project revenue.
For example, developers often negotiate a price floor with the host as part of these PPAs. Investors will typically model revenue based on this floor, removing the electricity risk from financial projections. If an investor is not modeling to the floor, they must model electricity prices for the next 20 years. If this is the case, they will require much higher returns for the added complication and risk compared to a typical fixed rate PPA. A compromise could be for the investor to model the project assuming the price floor as the price, leaving the developer with the upside of electricity prices in exchange for a lower acquisition price.
For your “every day,” one-off small commercial solar deal, a floating PPA is rarely worth the complication. They pencil for large wind deals that can afford the complicated diligence and an electricity hedge, or can work for the solar developer willing to take a lower margin to win a host that insists on such an arrangement.
At the end of the day, investors like to place capital in solar because of its secure, stable returns over a 15 to 20-year period. When an asset’s returned are tied to volatile electricity prices, that certainty is lost, and these deals become increasingly less attractive. We caution against floating PPAs; they could mean less money on the table for a developer.
This is an excerpt from our Solar Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail email@example.com.
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems has $550 million in assets under management as of December 2014. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystemscompany.com.