Solar power is one of the fastest growing sources of electricity in India and the world. Much of this growth in solar is driven by two factors, a fall in module prices making solar cheaper than almost every other generation method, and an increase in financing options available for consumers looking to install solar. However, before you install a solar plant through these methods, it is important to understand the subtle details.
What is a Solar PPA?
A Solar PPA or a Solar Power Purchase Agreement is an agreement signed between two parties when they wish to enter into a long term power sale agreement. In this model, a third-party investor agrees to install the plant on the roof of the user without the user paying the upfront costs involved. The user instead agrees to pay a fixed rate for the power produced by the plant for the term of the contract.
For more details on the workings of a PPA, read our detailed article on the matter.
When installing solar through a PPA, you need to consider the following points:
- Generation and Generation Guarantees
The savings that you are making on your plant is directly dependent on the Generation that the plant produces. The good thing is that the generation from solar plants is easily predictable for the life of the plant. Hence, it becomes important to set benchmarks that can be used to evaluate the effectiveness of the work done on the project.
Most of the leading developers today are ready to give consumer guarantees with regards to the generation. The standard industry practice is to guarantee between 80% to 90% of the expected generation of the plant. Consumers can also choose between different redressal mechanisms in case the generation is not able to meet the predetermined benchmarks.
The price at which a consumer will buy electricity for the entire tenure of the PPA is determined at the onset of the PPA. This price is usually guaranteed to be lower than the grid price. The pricing can be reduced by either increasing the tenure of the PPA or increasing the annual escalation. However, a consumer experiences the highest savings in a fixed value PPA for a shorter time as the plant is then passed onto the consumer and they can get practically free electricity for the remaining life of the plant.
To understand more about the tariff structure of a PPA, please read our detailed article on the matter.
- Payment Security Mechanism
Investors usually require a mechanism to guarantee payments of the electricity bills raised. This can be done through a revolving LC or a Bank Guarantee. The terms of the Payment Security can be discussed to arrive at a mutually convenient figure. Reasonable payment security allows an investor to relax several other important terms and conditions of the PPA.
- Change in Law Conditions
The Electricity Laws of the land have a direct impact on the PPA arrangement. However, they cannot be predetermined today. Hence, the Investor and the consumer need to have a detailed discussion on the different ways to handle any change in the law in the future. The major risk is the applicability of any duties or taxes in the future (today, the tax and duty for rooftop solar is 0). Consumers would have to give investor confidence for protecting their interests in case of any change in the law.
Most PPAs require the Investor to maintain a certain amount of insurance cover for the plant for the term of the PPA. By maintaining the insurance for the plant the consumer can be assured that any mishaps or natural events will not damage their long term solar plans.
- Safety Track Record of the Installer
Considering that the work is going to be done at height and there will be a regular work being done on the rooftops during the Operations and Maintenance phase, a past safety record of the installer can be an important parameter. The customers should focus on the proposed mechanism by the installer to ensure the safe operation of the plant. Most investors today use guide rails and safety lines as a rule of thumb. Despite increasing the costs, these setups can ensure that the operators have a safe environment to work in. As a consumer, you need to check on the safety policy of your installer.
- Buy Back Prices
In case the consumer wishes to exit the PPA, they will have to buy the solar power plant at a predetermined price. This price is usually depreciating every year through the straight-line method. By clarifying the buyback pricing of the project, a consumer can be sure to protect their long term interests. Buy Back prices usually are set at a premium of 10-20% from the actual system cost ensuring that the investor can make a decent return on their investment even if the consumer chooses to exit the PPA. They are, however, negotiable.
Although we have highlighted some of the main things to look for in a PPA, these are not all the things included in a PPA. Several other things ought to be considered, such as the components being used, the financing model being employed by the investors, the notation and assignments of the PPAs, etc. Before the consumer signs the agreement, they need to evaluate all of these parameters and many more. It is hence, advisable to work alongside a specialized service that is determined to ensure that you get the best value out of your solar project. SafEarth Online Marketplace is the leading service being used by consumers in their pursuit of solar power. When a consumer buys solar through our marketplace, they are guaranteed the best quality at the lowest price. You can contact the SafEarth team here.
Happy Solar To You!