Customer Power Purchase Agreements

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On this page:

• Examples from the Field
• Program Characteristics
• Reaching Underserved Communities and Addressing Consumer Protections
• Roles and Responsibilities
• Getting Started

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

Power purchase agreements generally share the following key features:

• They may allow customers to buy or receive RECs for electricity generated from renewable sources.
• They allow customers to buy electricity at a specified rate over the long term.
• The developer retains the ownership and responsibility for the operation of the renewable energy system and assumes the performance risk.
• They require the developer to install, operate, and maintain the renewable energy system.

Power purchase agreements may be administered by the following entities:

• Third-party developers are typically responsible for installing, operating, and maintaining the renewable energy system. Developers work with capital investors to help finance the project and will draft any agreement documents. In addition, developers will bill the customer for the electricity the systems generate.
• State legislators or public utility commissions establish 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.

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.

Examples from the Field⁸

Massachusetts Institute of Technology, Boston Medical Center, and Post Office Square Redevelopment Corporation Virtual PPA

• In 2016, the Massachusetts Institute of Technology joined with Boston Medical Center and Post Office Square Redevelopment Corporation to execute a virtual PPA for 60 MW of solar power from a new facility in North Carolina.
• At the time of development, the transaction was among the largest solar virtual PPAs in the United States.
• The project benefited from the use of cheaper, larger stretches of continuous land in North Carolina than were available in Boston.
• Status of energy attributes or REC conveyance to customers is unknown.

D.C. Department of General Services PPA

• In 2015, The District of Columbia’s Department of General Services began developing a large municipal portfolio of onsite solar energy projects. The portfolio consists of approximately 10.9 MW of solar electric capacity installed across 35 projects.
• The projects are being implemented using a physical PPA in which WGL Energy Systems owns the equipment, but the department purchases the power generated by the system at a reduced rate.
• The PPA is expected to save the District $30 million.⁹ The project developers retained the tax credits and RECs for the project.¹⁰

American University and George Washington University PPA

• In 2014, the Green Power Partners American University and George Washington University jointly signed a 20-year physical PPA with the Capital Partners Solar Project, supplied by Duke Energy Renewables.¹¹
• The agreement enabled the construction of a 52-MW solar array in North Carolina, which was the largest solar photovoltaic (PV) project east of the Mississippi River at the time.¹²
• The project is expected to supply both universities with about half of their respective power needs.¹³ Only a portion of the RECs generated from this project have been reported to EPA as having been conveyed and retired by the universities since the project became operational.

Denver Housing Authority PPA

• In 2013, the Denver Housing Authority launched a public-private partnership to install solar PV systems on single-family residential buildings for LMI residents.
• The project was financed through a physical PPA with a solar provider that enabled installations by providing the up-front capital and retained the RECs.
• Under the PPA, the initial price for solar electricity is comparable to existing utility rates. As utility rates increase over time, the project is estimated to save the properties between 15 and 20 percent on their average monthly utility bills.

Program Characteristics

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

Reaching Underserved Communities and Addressing Consumer Protections

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

• Have marginalized communities, consumer protection organizations, and organizations serving marginalized communities participated meaningfully in the policymaking process?
• Does the policy help address the impacts of inequality or inequity, or does it widen existing disparities?
• What are the barriers to more equitable outcomes?
• How will the policy increase or decrease economic, social, and health benefits for marginalized communities?
• Does the policy make energy more accessible and affordable to marginalized communities?

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.

Roles and Responsibilities

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.

Getting Started

State and local governments should consider these steps and best practices to utilize and foster the use of PPAs within their jurisdiction:

• What is the intent of the project? Low electricity rates, claiming the use of renewable energy, or both? This will determine which party will own the RECs based on the terms of the PPA.
• If setting up a new PPA authorization, determine whether you may need additional legal, regulatory, or legislative action to do so.
• Create an action plan for developing interest from PPA providers in your community, including those that work with LMI communities. Identify key staff needed to participate in the PPA process, including technical, financial, and legal experts.
• Engage with key stakeholders to inform the development of regulations or policies to facilitate the use of PPAs.
• Implement robust consumer protections.
• Develop and issue a request for proposals from interested contractors for identified projects.
• Determine a provider and develop a contract for construction, electricity rate, and term length, and involve all local stakeholders in the decision process.
• Determine outreach to consumers, including underserved communities, and the time and resources needed to ensure they are aware of the program. Provide clear, comparable project pricing information to potential customers so that they can make an informed decision about their purchasing options.
• Describe the program’s potential economic and environmental benefits, depending upon PPA volume.
• Streamline offerings so that the CSS program is integrated with existing energy assistance, energy efficiency, and job training programs to increase program participation and benefits for LMI customers.
• Work with utilities to simplify their processes for approving PPA projects to reduce administrative burdens for customers and developers.

References and Footnotes

¹ Cook, Jeffery, and Lori Bird. 2018. Unlocking Solar for Low- and Moderate-Income Residents: A Matrix of Financing Options by Resident, Provider, and Housing Type. National Renewable Energy Laboratory (NREL).

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.

⁴ International Renewable Energy Agency. 2018. Corporate Sourcing of Renewables: Market and Industry Trends.

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).

⁹ D.C. Department of General Services. (n.d.). Renewables + Energy Purchasing.

¹⁰ Better Buildings, U.S. Department of Energy. n.d. D.C. Department of General Services Develops Solar Project Using a Power Purchase Agreement.

¹¹ George Washington University. n.d. Capital Partners Solar Project.

¹² George Washington University. n.d. Capital Partners Solar Project.

¹³ George Washington University. n.d. Capital Partners Solar Project.

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.”