Buying out a Solar PPA

By Nick Weber

Many current Solar PPA customers (those buying the electricity) are trying to determine two things:

  1. When to evaluate a buyout of their Solar PPA, and
  2. How to evaluate a buyout their Solar PPA?

“When” is relatively simple, as many Solar PPA’s have similar buyout years and provisions.   The “How” is more complicated, as Solar PPA buyouts are relatively new in the solar industry.

Summary of PPA structure

One of the most widely utilized financing mechanisms for solar power is the Power Purchase Agreement, or “PPA”.  PPA financing utilizes a “third party” to build, own, operate and maintain the system, while the customer agrees to buy 100% of the electricity generated by the system.  Solar PPA’s are a popular option for tax-exempt entities, as it enables lower electricity prices via savings passed on from federal tax incentives captured by the “third party” owner.

Solar PPA Contract terms and Options

A typical Solar PPA contract can run from 15-25 years, but the most common is a 20 year term.  Over the 20 years of the Solar PPA, the customer (buying the solar electricity) pays a specified rate per kWh each year, as defined in the PPA contract.  In most PPA’s, the customer has the option to purchase the solar power system at the “greater of terminal value or the then Fair Market Value” at certain points throughout the PPA contract.  Many Solar PPA customers are trying to determine when they should evaluate a purchase of their solar power system.  Simply, the 5th year of the Solar PPA is the ideal time to evaluate the purchase option.

Why evaluate Solar PPA buyout during the 5th year?

Figure 1:  Actual Terminal Value solar power project table.  Note the substantial drop in terminal value from end of Year 5 to Year 6.

At the end of the 5th year of the Solar PPA, the “third party” owner has likely monetized all of Federal and State tax incentives available on the solar power system, a key financial hurdle for the “third party” owner.  At this time, there are 3 key variables working in the customer’s favor, which can create a strong case to evaluate the purchase the solar system from “third party” owner.

After 5 years:

Solar PPA Value Table
Figure 1: Actual Terminal Value solar power project table. Note the substantial drop in terminal value from end of Year 5 to Year 6.
  1. The “third party” owner has captured the available tax incentives, substantially lowering the terminal value of the system on the books of the “third party” owner (see Figure 1).

 

  1. Solar power system prices have steadily reduced, therefore lowering the “then Fair Market Value”.

 

  1. Electricity prices have increased, positively affecting the ROI of a purchase.

Evaluating the Buy Out versus continuing with the Solar PPA

A solar power system in most cases is a functional, working asset.  As with other asset classes, the evaluation of an asset is a straight forward process to determine: current market value, past and expected future performance, and operational costs.

Expanding upon the asset evaluation noted above, at minimum, an astute Solar PPA customer should consider the following when coming into the 5th year of a Solar PPA:

Current Market Value

i.            Thorough legal review of the contracted PPA and Site Lease language to determine the agreed upon Terminal Value and Fair Market Value calculation stipulations.

ii.            Commission an on-site inspection of the solar power system.  The on-site inspection will aid in determining both the Fair Market Value and Operational Costs required to run the solar system. The solar power inspection should be performed by a firm with current solar electrical and general contract licensing for the applicable state, and verifiable installation and working knowledge of the systems installed components (module, inverter, combiners, racking, optimizers, monitoring equipment, etc).

iii.            Comparables:  Solar power system comparables, “comps” are a great way to evaluate solar power system values in the market.  Unfortunately, there are a limited number of comps in the market to use.

Past Performance vs. Expected Future Performance

i.            Review the systems past performance against the projected performance when the contract was initiated.

ii.            Through the on-site inspection report, access the current performance of the solar power system and opportunities to increase production (inverter replacement, etc)

iii.            Utilizing actual weather data, correlated to the systems output, update the forecasted production numbers utilizing nationally accepted, investment grade modeling software.

iv.            Proforma economic value of solar system production as correlated to price per kWh in the Time-of-Use periods, for the current utility tariff.

v.            Based on system production, determination of value for the renewable energy credits, such as SRECs.

Operational Costs

i.            Line item evaluation of on-site system components to project operational life.  This information can be requested with the on-site inspection report.

ii.            Request Operations and Maintenance log book from “third party” owner to review scheduled and unscheduled maintenance. Please contact HelioPower for a solar maintenance checkup or solar field acceptance test.

iii.            Request warranty package information on the solar power system components.  It is critical to verify that the system was properly maintained, to verify that the component and system warranties can be transferred.
In closing, all Solar PPA’s have buyout provisions in place, which can be mutually beneficial to both parties.  It is the obligation of the customer, not the “third party” owner, to determine whether to exercise a buyout the Solar PPA, which is best calculated during the fifth year of the PPA term.

 

Nick Weber
nweber@heliopower.com

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