Categorization of Solar Contracts
Types of Solar Contracts
Customers can purchase the Solar system outright or lease it. Customer can also sign a Power Purchase Agreement or a PPA, meaning buy energy from solar plants but client don’t own the system. If Customer requires the captive plant then they should go for EPC contract, in EPC contract, the installer will develop the plant on turnkey basis. Customer choice of ownership options affects how much money they want to invest to save the electricity bills. On different contracting (PPA or EPC), It also affects the responsibilities of customers to take on after signing a contract.
Solar Power Purchasing Agreement (PPA)
A solar power purchase agreement (PPA) is a financial agreement where a developer arranges for the design, permitting, financing and installation of a solar energy system on a customer’s property at little to no cost. The developer sells the power generated to the host customer at a fixed rate that is typically lower than the local utility’s retail rate. This lower electricity price serves to offset the customer’s purchase of electricity from the grid while the developer receives the income from these sales of electricity as well as any tax credits and other incentives generated from the system. PPAs typically range from 10 to 25 years and the developer remains responsible for the operation and maintenance of the system for the duration of the agreement. At the end of the PPA contract term, a customer may be able to extend the PPA, have the developer remove the system or choose to buy the solar energy system from the developer.
Five Key Consideration to choose Solar PPA Contract
- Customer can set electricity tariffs rate with project developers that is sometimes flat, and sometimes calculated to rise over year on year basis according to the term of agreement.
- Project Developers take care of the operation & maintenance and any needed repairs and monitors customer system.
- Client don’t get any tax benefits or State rebates or Renewable Energy Credits (RECs).
- Developers are interested for PPA contract who has excellent credit rating to qualify for investment.
- Project developer offer to client usually buyout option to buy the plant later or at the end or during the agreement on a set buy out value of plant.
Pros & cons of PPA Contract
- No or low upfront capital costs: The developer handles the upfront costs of sizing, procuring and installing the solar PV system. Without any upfront investment, the host customer is able to adopt solar and begin saving money as soon as the system becomes operational.
- Reduced energy costs: Solar PPAs provide a fixed, predictable cost of electricity for the duration of the agreement and are structured in one of two ways. Under the fixed escalator plan, the price the customer pays rises at a predetermined rate, typically between 2% – 5% annually. This is often lower than projected utility price increases. The fixed price plan, on the other hand, maintains a constant price throughout the term of the PPA saving the customer more as utility prices rise over time.
- Limited risk: The developer is responsible for system performance and operating risk. The customer just needed to pay the electricity produced by the plant.
- Better leverage of available tax credits
- Potential increase in property value
- Deemed Generation: One thing power purchaser should especially look out for in a PPA is that the amount of energy the system produces actually meets the demand. The contract will typically require for power purchaser to buy all the energy the system generates, whether purchaser can use it or not. So if the solar system is too big, power purchaser will pay for something they don’t need. If it is too small, purchaser don’t save as much as they could have. Make sure purchaser know their annual energy consumption, measured in kilowatt-hours (kWh), and check that the system’s estimated output is a match. Also, keep in mind that purchaser energy needs might change over 25 years. Consumption will go down or it might rise.
- Customer’s tie for 25 Years: Once customer has the PPA then it will also the customer obligation to uphold the contract for 25 years.
Solar Engineering, Procurement & Construction (EPC) Contract
Unlike PPA contract, in EPC procurement and design are considered separate processes and are undertaken simultaneously, reducing the overall duration of the project. Initially, the EPC contractor that had the required technical and financial capability to execute such contracts and take the full responsibility of project development. In this contract profile, EPC contractor developed the technical expertise and financial capability, and project owners award them complete projects as a single turnkey contract.
This Engineering, Procurement and Construction (EPC) Agreement is designed for a developer or solar system owner and an EPC contractor to use when the EPC contractor will be responsible for the design, procurement, construction, commissioning and handover of the solar project to the owner or end-user. This Agreement is often used when a third-party will be purchasing the electricity produced by the solar system and tax equity or other investor interests are a priority. Key sections in this Agreement include, but are not limited to, section covering change orders, limitations of liability, indemnification, insurance, dispute resolution, unforeseen site conditions, changes to legal requirements, time impact and availability, work exclusions, warranty, early completion bonus, and owner installation and commissioning assistance requirements.
Five Key Consideration to choose Solar EPC Contract
- Like buying any product, Customer select from a range of features offered by a solar supplier, who’s then responsible for fulfilling your order which include all procurement, installation and generation guaranty up to certain period of time. The major EPC contract can be divide into two separate contracts, a “supply” contract for the design and supply of the complete PV system ready to mount, and an “installation” contract relating to the installation of the PV system, the supply of the balance of plant and the commissioning.
- The supplier is the main contractor that is responsible for the engineering, design, procurement, supply and delivery of the PV system and for the performance of ancillary work to complete the facility. The main purpose of the EPC Agreement is to set out details of the engineering, design, procurement, supply and delivery of the PV system and of the performance of ancillary work for completing the facility.
- This contract also defines and guarantees a minimum installed capacity and a minimum performance ratio, which are the key drivers of this contract. The solar system is supposed to last 25 years or longer, so it is important to choose quality components and a solar installer that customer can trust.
- In this Contract, Client will be responsible for maintenance. While there usually isn’t much maintenance required, it is a good idea to put aside 2% of the system price each year to cover expenses.
- Client need to know how to monitor system performance. Otherwise, a drop in energy production can easily go unnoticed for months, leaving a serious dent in solar savings plan. In this case customer hire a separate operation & maintenance (O&M) Service provider. Which turns extra financial burden on return of Investment.
Pros & Cons of EPC Contract-
- In EPC contract client need to invest only one time for 25 Years. They did not have burden to pay monthly bills of generated electricity.
- This type of facility is secured, along with the rest of loan, the finance rate on this contract is usually lower than any other form of finance.
- The advantage of this type of plant is that customer have total freedom to monthly payments for a long period of time.
- Buying plant from EPC contract offers you more flexibility and freedom. You have more freedom in terms of the quality of system component you put on your plant, the brand of solar panels you choose and the type of inverter you choose. Solar PPA companies tend to control all of these choices for customer
- Another advantage of buying a solar system is that you do not have to deal with the solar transfer issue on the sale of customer asset. When customer buy solar outright it adds value to customer asset.
- The first disadvantage of going for EPC is that customer have to pay significant amount. This payment can either come from savings or a loan of some type.
- The second disadvantage is that customers are responsible for the maintenance of the system. However the solar panels and inverters will have a warranty but for warrantable claim there are many complications with manufacturers which generally customers are not aware and cannot directly deal for.