Power Purchase Agreement for Solar: What Landowners Should Know

Topic: solar projects Read Time: 7 mins
Landowner type:
Independent landowners | Institutional landowners
Energy: Solar
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Are you in the negotiation phase of a lease? Have you been trying to figure out what a Power Purchase Agreement for solar is? Join us as we demystify the world of PPAs and why you should learn more about them as a landowner.

If you’ve decided to get a solar project on your land, you’ll have a LOT to think about. From engaging experts like solicitors and land agents to figuring out your ideal payment arrangement, you may feel overwhelmed.

However, you might not have heard of an essential part of the puzzle for many new sites – a power purchase agreement for solar projects. While landowners won’t have much say in these agreements, it’s always worth being aware of them before engaging with a developer.

Now, many landowners choose payment arrangements that operate as a fixed payment per acre. This essentially gives the landowner a fixed amount each year for leasing their land. But if you’re opting for a performance-based arrangement, PPAs are something you definitely want to be aware of.

So, we highly recommend sticking with us to find out exactly what these agreements may mean for you.

Simply put, a Power Purchase Agreement (PPA) is an agreement between a site operator and the energy off-taker. The agreement is in place for a set period of time. It also includes a specific arrangement for the site operator to sell the electricity to the energy off-taker. This long-term electricity supply agreement usually allows consumers to receive energy at a stable cost. It also gives the developer a reliable rate for the energy produced by a project. As a result, it can reduce the risks associated with a fluctuating energy market.

So, now that we’ve reviewed the term’s basic definition, let’s examine how these agreements work.

The process usually runs as follows:

  • 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 then receives income from sales to the off-taker PLUS any tax credits they’re due from the system.

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

There are a few different types of PPAs that give consumers (AKA: off-takers) different purchasing options.

The most common ones are:

Sleeved PPAsThese connect businesses directly to solar farms across the UK and are an excellent option for local authorities.
Private Wire or Onsite PPAsThese Power Purchase Agreements allow businesses to buy energy directly from the source, usually cutting out the middleman.
Offsite PPAsThese PPAs cover most agreements where energy production is off a client’s physical premises. These PPAs apply to offshore turbines or a renewable energy facility owned by an international developer.
Synthetic or Virtual PPAsThese purely financial agreements involve no physical energy delivery to the consumer. Instead, clients commit to buying a fixed quantity of energy, which they will reinvest into green infrastructure or other ventures. These are relatively rare, but they’re worth knowing about.

Power Purchase Agreements usually benefit developers and off-takers the most, and that’s what we’ll be covering in this section. However, you should stay tuned for the rest of this article to learn how these PPAs could also benefit landowners.

PPAs are usually a good idea for developers as they allow both parties to plan a project for the long term. As most solar leases run for upwards of 35 years these days, avoiding long-term price commodity risks is a huge benefit. After all, it’s better to sign on for an extended period if you can guarantee a client for the energy your site produces.

A woman using an tablet to review a Power Purchase Agreement

When a developer and off-taker sign a PPA, the solar provider (AKA the developer) will assume responsibility for all upfront costs. These costs include labour, equipment purchases, maintenance costs, and everything in between.

The PPA lets developers adequately budget for the process and guarantees that the energy will be sold at the end of the day. Landowners will also know that they’ll receive income, as the developer is unlikely to go insolvent with a fixed contract in place.

Not only does the PPA help to 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 such a long period always puts a developer’s mind at ease. So, PPAs are generally a win-win for the off-takers and the developers.

These benefits 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.

Okay, so we know that there are definite positives to having a PPA in place. However, as the demand for renewables is likely to increase over time, entering into PPAs may disadvantage developers and landowners in the future.

Long-term price certainty is a benefit, but it somewhat limits earning potential. This is because the energy can be sold to an off-taker at a lower rate than other purchase agreements. It’s also worth mentioning that PPA payments can vary throughout the year. Because of irradiance levels, they tend to be higher in the summer and lower in the winter.

Contracts for these agreements 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.

Now that we’ve covered PPAs in more general terms, let’s examine how these agreements affect landowners (and whether they’re a good idea).

Just so you’re aware, a 1MW site would typically generate around £500,000 a year from selling energy. And as a landowner, you’d be entitled to a share of income generated from the site if there’s a PPA arrangement in place.  But this isn’t quite as simple as it sounds.

While you’d think that a share of income was a given, many developers propose a fixed payment arrangement to landowners. 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.

A landowner walking through his farm

Developers aren’t trying to deceive landowners by any means, but they don’t always want to share the details of the PPA with a landowner. This is because they’re considered 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.

But if a landowner is on anything OTHER than a fixed payment arrangement, a developer should calculate their rent based on the performance of the PPA.

As it’s in a landowner’s best interest to have a complete picture of all facets of your project, you absolutely should push for access to the PPA data if you choose a variable payment arrangement.

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.

The clause is usually multiplied by the quantity of electricity produced. This should give you a final income figure for how much is due to be paid each year.

There is usually a minimum duration for a PPA, and a developer often needs to give evidence to the off-taker that they have secured the land for that period.

A developer checking the paperwork of a solar farm project

So, the lease must have been signed for a set period before most off-takers will agree to purchase the energy. Just so you’re aware, the lease has to mirror (or be longer) than the duration of the PPA. Although this will only impact landowners a little, it’s worth fully understanding the terms of a general PPA before signing your lease. This way, you can decide which payment arrangement will benefit you most.

You won’t need to know the exact ins and outs of a PPA to benefit from them as a landowner. However, if a landowner knows how much money is paid on the PPA, they can calculate the total value of the site and determine whether they’re getting paid correctly. If they have no idea, underpayments can happen and remain unchecked for years because of the complexity of these arrangements.

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

For developers, PPAs can offer excellent project stability for up to 25 years. For that reason, they’re certainly a vital part of many solar projects in the UK. However, they may not allow landowners to reap maximum rewards from their project, as income can be capped if they choose a fixed payment arrangement. 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. By running your site through our Lumigraph tool and comparing it to projects across the UK, we can reveal any underpayments that you’re owed down to the pound.

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