i am your guide to solar finance

Power purchase agreement

With a power purchase agreement (PPA) you pay nothing upfront for the solar system. You enter into a long term agreement with your solar or energy retailer to have a solar system installed on your roof and for you to purchase the electricity generated at an agreed price per kWh. This rate is usually lower than for grid electricity. The term is usually 10-15 years, but can be up to 20.

Also known as pay-as-you-go solar or solar lease

Finance details

Period PPA tariff Early repayment possible
7 - 20 years $0.15 - $0.25/kWh No

Ownership of the solar system

  • The PPA provider owns the solar system – you just purchase the energy it produces.
  • You may have an option to purchase the solar system or enter into a new PPA at the end of the agreement. 

Financing costs, fees and charges

  • The PPA tariff rate may increase each year over the contract.
  • Potential for establishment and administration fees.
  • Potential for early exit fees.

Performance and maintenance costs

  • The financier is responsible for monitoring system performance and the costs of any out-of-warranty maintenance required, such as inverter replacement.

Advantages

  • Payments are likely to always be lower than bill savings, so you save money.
  • Maintenance and system performance is the responsibility of the PPA provider.

Disadvantages

  • Not using all the electricity the system produces can mean losing money
  • A longer contract period may mean higher interest costs and paying more for the system in the long term.
  • Additional finance may be needed to buy the system or sign a new PPA at the end of the agreement, but the period of the agreement is usually shorter than the life of the panels.

Managing risks

  • PPAs are often priced at a premium to cover the costs of monitoring and maintenance. Make sure the PPA provider takes responsibility for these costs.
  • You pay for the power the solar system produces whether you use it or not. Make sure you buy a system correctly sized for your needs.
  • For an investment property you may have trouble passing costs on to tenants. Check with your property manager.

Example

Below is an illustration of how the costs and bill savings could work under a PPA.

In practice these costs and bill savings will vary depending on what you pay for the system, how much energy it produces and how much you use, and the period and costs of any payment plans of financing.


Solar project

Solar system size (kW)

3kW

Upfront system cost ($ net STC subsidy)

$5,200

Proportion of power used (%)

67%

Life of system

25 years

Maintenance costs

(Assume a new inverter is required every 10 years)

$4,300

 

Cost of daytime grid electricity

$0.20 to $0.51 / kWh

Payment conditions

Deposit/initial payment

$0

Term of finance

$0.20/kWh PPA tariff

20 years, 10% residual payment at end of 20 years to own system

Comparison interest rate

15%

Costs and bill savings

Total payments

$16,100

Total bill savings

$20,600

Net savings

$4,500

 

Effective interest rate

15%

Lifetime unit cost of energy

0.18 $/kWh

The chart below illustrates the annual cash flow of energy bill savings and the costs of the solar PV system and finance based on this scenario.

PPA purchase of 3kW system for household at home during work days

The chart shows that the cost of the PPA is matched to the energy bill savings so that you are never out of pocket. The system delivers small net savings in every year apart from year 20, when the system is purchased outright for 10% of the original purchase price.

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Page last updated: 18 December 2015