There’s no such thing as a free lunch – what are the risks and consequences of PPAs?
We take a balanced approach at Voltaic. While we think PPAs are a wonderful, clever initiative that will play a significant role in accelerating Australia’s transition to renewable energy, we understand that they are not perfect. While they offer a number of clear benefits, businesses need to understand the risks and the commitment they are making.
Downsides
Savings – a business that enters into a PPA will not keep all the savings of a solar system compared to a business that pays for it upfront. If a business is able to afford the upfront cost of a solar system, it will be able to generate free, clean electricity when the sun shines. The money otherwise paid to Voltaic for the generated electricity will be saved by the business.
Long-term agreements – Another downside of entering into a PPA is the length of the agreements. PPAs less than 10 years often require an electricity rate higher than is otherwise available to the business. For example, to generate the fund’s target return, we might need to charge 20c/kWh, when the business is already paying 15c/kWh. It doesn’t make financial sense. On the other hand, PPA terms of 20 years plus are fantastic as they can result in super low electricity rates. But, many businesses do not want to enter into 20 year contracts. 20 years is a long time! Businesses need to understand the long-term commitment required by PPAs. While there are exit options if a business chooses to leave a location, it is desirable to have long-term plans in the one location. Voltaic is constantly reviewing PPA opportunities and does not fund all of them. Voltaic has a preference for PPAs with businesses that have stable long-term plans, in stable industries and a long operating history.
Risks
Voltaic bears most of the risk associated with PPAs as Voltaic is putting the fund’s capital at risk by paying for the upfront installation. However, there are still some risks for businesses.
The main risk to a business is usage. Voltaic sells electricity generated by the solar systems to the businesses, whether the business uses the electricity or not. The connection point is metered and measures every unit of electricity generated. If the business is not operating, be it a weekend, holidays or downtime, the business still needs to pay for that electricity. Currently the business can sell that electricity to the grid and receive a feed-in-tariff from their electricity provider. However, feed-in-tariffs are expected to decrease towards zero and even then, the feed-in-tariff is likely to be less than Voltaic’s charged rate.
The key to managing this risk is system sizing. It is essential that the installer, Voltaic and the business work together to appropriately size the installed system. This is very much in Voltaic’s interests as well and we want to avoid systems which generate too much electricity.
Further Reading
Power Purchase Agreements: The Basics