In a weak economy, PPAs stand strong

AltaTerra Research Network brings business acumen and sustainability together in a host of advisory services and quantitative analysis projects. One of their latest products is a report on Power Purchasing Agreements (PPAs). The report looks at the performance of PPAs in 2008 and examines their performance in an uncertain market. Perhaps most importantly, though, for the solar industry, the report provides the first hard data on the numbers of PPA-funded solar installations nationwide in 2008.

A quick refresher on PPAs: as opposed to leasing, wherein you pay a third party financier over time in order to gain ownership of the PV system, in PPAs the ownership remains with the financier. The owner of the building where the solar is installed now pays the financier a fixed monthly rate for electricity. The building owner benefits by having predictable, stable energy costs for the contracted term, and the financier benefits by receiving all the tasty tax credits attendant upon owning a commercial solar electric system.

AltaTerra’s report, “Financing Growth: Will Solar PPAs Shine in Dark Times?”, looks at the role PPAs played last year in bringing new commercial customers to solar. When the rest of a company’s economics are in such doubt, it stands to reason that buying into stable energy prices should look more appealing than ever.

One of the interesting things AltaTerra  found is that big business is in the phase of exploration: a lot of different sectors are heading for early adoption, retail specifically. Co-founder and Managing Director of AltaTerra, and co-author of the report, Dr.  Jon Guice says that “this is as much historic as economic. In retail, a 1% savings has a big impact across the board,” making a big investment in what seems like a small return actually worth it. Brand awareness plays a role here too: think about WalMart’s efforts to green up, for instance. In addition to retail, the report found that about 20 different segments have a significant investment in PPA solar. While segments like wineries, that have been buying solar outright for some time, are also noted, most of the segments noted are new to solar. This is convincing evidence that the PPA format is the deciding factor for many companies when it comes to solar. (Why are companies deciding to go solar in general? We talk about that in more depth at GetSolar.com.)

I asked Jon if AltaTerra’s report speaks to the role of PPAs in the event of solar cost reduction due to new technology or higher incentives, scenarios that would make solar more affordable and possibly much more attractive as an in-house expenditure. The report doesn’t deal with this directly, though future reports may. In addressing the issue, he made an interesting comparison of solar technology to computers in the 1970’s: “We’re definitely on a cost curve but the curve is not super fast.  That being said, there’s no question that in many places in the US we’re heading towards a really important point: cost parity.” Of course, achieving cost parity–the point at which the cost of obtaining your electricity from solar will be equal to the cost of purchasing it from utilities–depends on technology, manufacturing, and incentives. At this point, many feel cost parity is a question of time rather more than anything. The slow cost curve Jon mentioned means it’ll be a long time before the value of PPAs gets called into question; solar is going to remain expensive for a long while yet.

“Financing Growth” will be an asset to anyone looking for the hard numbers behind the PPA finance market for solar in 2008, as well as those interested in trying to assess how the market will behave in this prolonged economic downturn. AltaTerra has other reports that appeal to different sectors of the solar industry, like the more consumer-oriented one on solar employee purchasing programs offering deep qualitative information on how you run such a program successfully; they also offer looks at European solar markets, and a look at why the US may just be the world’s next, biggest solar market.