Power Purchase Agreements for Solar: A Landowner’s Guide

Here’s what you need to know about Power Purchase Agreements (PPAs) for solar if you’re in the negotiation phase of a lease.

If you’re considering a solar project on your land, there’s a lot to think about. From engaging experts like solicitors and land agents to figuring out your ideal payment structure, it’s easy to feel overwhelmed.

One crucial element that many landowners might not have heard of is the Power Purchase Agreement (PPA) for solar projects. While landowners generally won’t have much influence over these agreements, it’s still important to be aware of them before engaging with a developer.

Typically, landowners choose payment arrangements that operate as a fixed payment per acre, which guarantees a set annual payment for leasing their land. But if you’re leaning towards a performance-based arrangement, PPAs are something you definitely want to be aware of.

In this article, I demystify PPAs and explain why they’re an essential piece of the puzzle for your solar project.

What Is a Power Purchase Agreement for Solar?

A Power Purchase Agreement (PPA) is an agreement between a site operator and an energy off-taker. This agreement outlines the terms for the site operator to sell electricity to the off-taker over a set period.

For consumers, a PPS provides access to energy at a stable cost. For developers, it ensures a reliable rate for the energy produced by the project. As a result, it can reduce the risks associated with a fluctuating energy market.

Here’s a breakdown of how a typical PPA works:

• The developer sells power to the off-taker at a lower rate than the local utility’s retail rate.
• The lower price offsets the customer’s purchase of electricity from the Grid. 
• The developer receives income from both the sales to the off-taker and any tax credits they’re due from the system.

PPAs typically last between 10 and 25 years. During this time, the developer is fully responsible for maintaining the solar project. When the contract period ends, the off-taker can choose to either extend the PPA or end the agreement.

What Are the Different Kinds of Solar PPAs?

There are several different types of PPAs, each offering different purchasing options for consumers (off-takers).

The most common ones are:

What Are the Benefits of a Power Purchase Agreement for Solar?

Power Purchase Agreements (PPAs) usually benefit developers and off-takers the most, but they can also offer advantages to landowners – so stick around to learn how they apply to you.

For developers, PPAs provide a way to plan long-term projects with certainty.

As most solar leases today run for upwards of 35 years, avoiding long-term price commodity risks is a huge benefit. A PPA ensures that the developer can secure a consistent buyer for the energy their site produces over an extended period.

When a developer and off-taker sign a PPA, the solar provider (the developer) will assume responsibility for all upfront costs, including labour, equipment purchases and maintenance costs.

The PPA lets developers adequately budget for the process and guarantees that the energy will be sold.

For landowners, this translates into a stable income stream, as the developer is less likely to go bankrupt with a fixed contract in place.

Not only does the PPA help developers avoid the worst of wholesale price volatility, but it also removes many of the costs associated with buying electricity through the Grid. Plus, having a guaranteed consumer over the long term always puts a developer’s mind at ease, making PPAs a win-win for both off-takers and developers.

The benefits of PPAs are generally reflected in the fact that PPA prices are increasing. While this is less preferable for the off-takers, the developers will start seeing them as even more attractive.

What Are the Disadvantages of a Power Purchase Agreement for Solar?

While there are definite positives to having a PPA in place, there are also some drawbacks to consider. As the demand for renewables is likely to increase over time, entering into long-term PPAs may disadvantage developers and landowners in the future.

While the long-term price certainty of a PPA is a benefit, it also somewhat limits earning potential. This is because the energy can be sold to an off-taker at a lower rate than other purchase agreements.

Additionally, PPA payments can vary throughout the year. Due to variations in irradiance levels, payments tend to be higher in the summer and lower in the winter.

Contracts for PPAs can also be complex. Developers need to consider the duration of the contract, whether the rates are fixed or subject to increase over time, and any conditions for terminating the agreement.

How Do PPAs Affect Landowners?

Now that I’ve covered the basics of PPAs, let’s examine how these agreements affect landowners (and whether they’re a good idea).

How does the solar PPA work?

For context, a 1 MW site could generate around £500,000 a year from selling energy. If there’s a PPA arrangement in place, landowners are typically entitled to a share of income generated by the solar site.

But this isn’t quite as simple as it sounds.

While some developers offer landowners a share of income, it’s more common for developers to propose a fixed payment arrangement.

This isn’t necessarily bad, as the fixed arrangement lets landowners easily understand how much income they’ll receive each year.

However, these fixed arrangements aren’t typically as lucrative as performance-based payment arrangements, where the landowner’s earnings are tied to the success and output of the solar project.

So, where does the PPA come in, and how does it impact landowners?

Developers aren’t trying to deceive landowners. But developers don’t always want to share the specifics of the PPA as these details are often commercially confidential.

For this reason, most landowners will take a developer’s word for how much their site is worth and go with a fixed payment arrangement to make things easier.

However, if a landowner is considering a variable payment arrangement, it’s crucial to understand how the PPA impacts your earnings.

Developers should calculate rent based on the performance of the PPA, and it’s in the landowner’s best interest to fully understand the terms and potential returns.

If you’re going down this route, you absolutely should push for access to the PPA data, ensuring you have a complete understanding of the deal before committing.

Can a Power Purchase Agreement for solar impact how the lease operates?

A Power Purchase Agreement for solar can absolutely impact how a lease operates. This is because, if a landowner is being paid a royalty, they’ll have a royalty clause in their lease that outlines how much rent will be paid.

You’ll usually multiply this clause by the quantity of electricity produced. This gives a clear formula for determining how much the developer should pay the landowner each year.

Additionally, there is usually a minimum duration for a PPA, and the developer must provide evidence to the off-taker that they’ve secured the land for that period.

This means that the lease must match or exceed the length of the PPA for the project to go ahead. As a result, the terms of the PPA directly influence the lease duration.

Although this will only slightly impact landowners, it’s worth understanding the terms of a general PPA before signing your lease. This way, you can decide which payment arrangement will benefit you most.

Will having a better knowledge of PPAs help landowners secure a better deal?

You won’t need to know the exact ins and outs of a PPA to benefit from them as a landowner. However, it’s a good idea to understand how much money your developer is paying on the PPA. This way, you can calculate the total value of the site and determine whether it’s paying out correctly to you.

If you have no idea, underpayments can go unchecked for years due to the complexity of these arrangements.

Typically, this isn’t intentional, but developers aren’t always up to date on the latest market rates. Fixed payment arrangements are often easier for both parties and can become a default choice as a result.

Final Thoughts

For developers, PPAs can offer excellent project stability for up to 25 years. For that reason, they’re a vital part of many solar projects in the UK.

However, they may not allow landowners to reap maximum rewards from their project. This is because a fixed payment arrangement can cap potential income.

It’s also worth mentioning that developers may be resistant to sharing details of their PPAs with landowners. So, ensuring that your rental payments are correct can be tricky if you simply don’t have all the information.

If you’re interested in getting the best deal possible while leasing your land, get in touch with the friendly team at Lumify Energy.

Our SiteView360 solution is ideal for checking on any site that’s already up and running. We’ll run your site through our Lumigraph tool and compare it to projects across the UK. With detailed information in hand, we can reveal any underpayments that a site operator owes you – down to the pound.

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