What is a power purchase agreement and how does it work for businesses

How PPAs function for commercial customers

A Power Purchase Agreement (PPA) is a contract where a developer owns, installs, and operates a solar system on a customer’s property and sells the generated electricity to the business at a predetermined rate. The host typically pays for the electricity produced rather than buying the system outright. PPAs can be attractive for businesses that want immediate bill savings without upfront capital expenditure.

Key features of PPAs:

• Third-party ownership: Developer claims tax credits and depreciation
• Fixed or escalator-based energy rates: Often lower than prevailing utility rates initially
• Term length: Commonly 10–25 years with performance guarantees
• Operations and maintenance: Typically handled by the owner/developer

Advantages and considerations

• Advantages: Little or no upfront cost, predictable energy pricing, and reduced operational burden
• Considerations: Long-term contractual commitment, potential site lease terms, and the host doesn’t retain tax incentives

A well-structured PPA includes performance guarantees, terms for system removal at contract end, and provisions for business sale or roof changes. Legal and financial review is important to ensure alignment with corporate accounting and tax policies.