Because photovoltaic panels, commonly known as solar panels, are steadily becoming cheaper, it’s easier than ever before to go fully or partly off grid. But freeing an office building or micro business from Eskom can still require a big financial outlay. Luckily there are solar suppliers who will just about let you have your cake and eat it, in the form of a PPA.
A solar power purchase agreement (PPA) is a financial agreement where a solar system supplier arranges for the design, permission, financing and installation of a solar power system on a customer’s property, at no cost. The supplier sells the power generated to the host customer at a fixed rate typically lower than the local retail rate.
This lower electricity price offsets the customer’s purchase of electricity from the Eskom grid, while the supplier receives the revenue from these electricity sales. PPAs typically range between 5 and 15 years and the supplier remains responsible for operating and maintaining the system throughout the duration of the agreement.
At the end of the PPA term, a customer can extend the PPA, have the developer remove the system, or choose to buy the solar system from the solar supply company.
A typical power purchase agreement would look something like this: Software company CleverSoft wants to get off the Eskom grid, but they can’t afford to spend the requisite R500 000 on solar panels and inverters. CleverSoft contacts AlphaSolar who agrees to install solar panels and related infrastructure at CleverSoft’s premisis at no cost, provided the software company buys the electricity thus generated from AlphaSolar.
The agreement also states that after ten years, the solar panels system become the property of CleverSoft, giving them ‘free’ or very cheap electricity for ten years or longer, depending on the lifespan of the inverters and panels.
Yes, because it allows the customer to buy electricity at a rate lower than Eskom’s, right from the start. Instead of paying approximately R1.20 to R2.20 per kWh (kilowatt hour), the customer pays around 90 cents to R1.50 per kWh, depending on the size and capacity of the solar installation.
When the agreement ends, ownership of the solar system transfers to the customer. That’s when the big savings start. The internal rate of return (IRR) of a PPA is 20% or more for the customer – a boost to any enterprise’s bottom line.
the monthly savings on electricity (it will eventually pay itself off over time)
Five to fifteen years. Factors like the customers’ budget and its risk profile determine the duration of the agreement.
With a PPA, the customer agrees to buy electricity from the supplier, even though the solar system is on the customer’s property, e.g. the roof of your office building, warehouse or factory.
If you decide to lease a solar system instead, your business will pay a set fee per month, instead of buying electricity from the supplier.
This depends on factors like your organisation’s cash reserves, cash flow, the nature of your business and government or municipal policy, which is in flux here in South Africa. Because of the uncertainty, a PPA could be a less risky and less complex way of divorcing Eskom.
Another advantage of PPAs are that the supplier takes care of maintenance, ensuring the reliability and good performance of the supply. Additionally, a predictable expense on the balance sheet makes it simple for an enterprise to budget and perform cash forecasting.
Go to Sparrot’s commercial calculator and enter the amount that your business currently spends on electricity and the rate per kWh. It will estimate what the system will cost, the payback period, the monthly saving and tax break.