Power Purchase Agreement Checklist for State and Local Governments
This fact sheet provides information and guidance on the
solar photovoltaic (PV) power purchase agreement (PPA),
which is a nancing mechanism that state and local govern-
ment entities can use to acquire clean, renewable energy. We
address the nancial, logistical, and legal questions relevant
to implementing a PPA, but we do not examine the technical
details—those can be discussed later with the developer/con-
tractor. This fact sheet is written to support decision makers
in U.S. state and local governments who are aware of solar
PPAs and may have a cursory knowledge of their structure
but they still require further information before committing
to a particular project.
Overview of PPA Financing
The PPA nancing model is a “third-party” ownership
model, which requires a separate, taxable entity (“system
owner”) to procure, install, and operate the solar PV system
on a consumer’s premises (i.e., the government agency).
The government agency enters into a long-term contract
(typically referred to as the PPA) to purchase 100% of the
electricity generated by the system from the system owner.
Figure 1 illustrates the nancial and power ows among the
consumer, system owner, and the utility. Renewable energy
certicates (RECs), interconnection, and net metering are dis-
cussed later. Basic terms for three example PPAs are included
at the end of this fact sheet.
The system owner is often a third-party investor (“tax inves-
tor”) who provides investment capital to the project in return
for tax benets. The tax investor is usually a limited liability
corporation (LLC) backed by one or more nancial institu-
tions. In addition to receiving revenues from electricity sales,
they can also benet from federal tax incentives. These tax
incentives can account for approximately 50% of the project’s
nancial return (Bolinger 2009, Rahus 2008). Without the
PPA structure, the government agency could not benet from
these federal incentives due to its tax-exempt status.
1
The developer and the system owner often are distinct and
separate legal entities. In this case, the developer structures
the deal and is simply paid for its services. However, the
developer will make the ownership structure transparent to
the government agency and will be the only contact through-
out the process. For this reason, this fact sheet will refer to
“system owner” and developer as one in the same.
While there are other mechanisms to nance solar PV
systems, this publication focuses solely on PPA nancing
because of its important advantages:
2
1. No/low up-front cost.
2. Ability for tax-exempt entity to enjoy lower
electricity prices thanks to savings passed on from
federal tax incentives.
3. A predictable cost of electricity over 15–25 years.
4. No need to deal with complex system design and
permitting process.
5. No operating and maintenance responsibilities.
1
Clean renewable energy bonds (CREBs) are also available to municipalities
and other public entities as an alternative means of beneting from federal tax
benets.
2
For a full discussion of alternative nancing mechanisms, see Cory et al.
2009.
Figure 1
Contracts and Cash Flow in Third-Party
Ownership/PPA Model
Fact Sheet Series on Financing Renewable Energy Projects
Energy Analysis
NREL is a national laboratory of the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.
Power Purchase Agreement Checklist
for State and Local Governments
Utility buys unused
solar electricity;
net-metering
interconnection
agreement
Developer buyout provision
Money
Electricity/RECs
Consumer buys
solar electricity
from developer
C
o
n
s
u
m
e
r
U
t
i
l
i
t
y
S
y
s
t
e
m
O
w
n
e
r
Utility buys renewable
energy credits from
system owner
Consumer
buys
traditional
electricity
System owner
installs, owns,
maintains PV
system on
consumer facility
Source: NREL
National Renewable
Energy Laboratory
Innovation for Our Energy Future
Sponsorship Format Reversed
Horizontal Format-B Reversed
Color: White
Vertical Format Reversed-A
Vertical Format Reversed-B
National Renewable
Energy Laboratory
National Renewable
Energy Laboratory
Innovation for Our Energy Future
National Renewable Energy Laboratory
Innovation for Our Energy Future
Horizontal Format-A Reversed
National Renewable Energy Laboratory
Innovation for Our Energy Future
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