Power Purchase Agreement (PPA) financing is a “third-party” ownership model which requires a separate, taxable entity (system Owner) to procure, install, and operate the solar photovoltaic (PV) system on a consumer’s premises. The consumer enters into a long term contract (PPA) to purchase 100% of the electricity generated by the system from the system owner.
The system owner is often a third party investor (“tax investor”) who provides investment capital to the project in return for tax benefits. The tax investor is usually a limited liability corporation (LLC) backed by one or more financial institutions. In addition to receiving revenue from electricity sales, they can also benefit from federal tax incentives. These incentives can account for a significant portion of the project’s financial returns. Without the PPA structure, a non-profit consumer could not benefit from these federal incentives due to their tax exempts status.
The developer and the system owner often are distinct and separate legal entities. Typically, the developer structures the deal and is simply paid for its services. However, the developer will make the ownership structure transparent to the consumer and will be the only contact throughout the process.
While there are other mechanisms to finance solar PV systems, the importance advantages of PPA financing are as follows: