If you’re a contractor, there are a few questions you should be thinking about when looking into offering a PPA.
Does it affect your bottom line?
As a contractor, you want to be able to sell the products you want to sell, at the price you want to sell them. Solar PPA’s have a very specific financial window to meet in order to make sure that the PPA company is profitable. What does this mean for solar contractors? It will tend to mean that they need the system to be cheap enough to have a full payback within a very short amount of time.
This does not mean that a solar PPA company does not want a high quality installation (they most certainly do) because they own the system and will need to pay for any repairs. But it might cause some complications. For example, if you prefer to use micro-inverters that tend to be more expensive up-front than centralized inverters, you may get some pushback from PPA providers. However, if you're in the right market, providing a PPA may allow you to sell more systems just at a lower margin. If you’re thinking about partnering with a PPA firm, just be sure to ask and be clear about if there are any restrictions on the cost per watt that you can sell systems, and how many systems you think you can sell.
How Hard Is it to Partner with a PPA Company?
When you’re starting a company, momentum is everything. Driven by their need to minimize risk and make sure installations are done correctly, PPA companies will only partner with established solar installers that have a proven track record and have been installing solar for years. If you don’t already have a supreme track record and history, it might be difficult to partner with a PPA company. Good news for the homeowners and industry, not so much for the new guys. Trying to work with them might be wasting your time until you have a proven track record. If you’re just getting going, just focus on building out your competency, getting your first few clients and building out your companies marketing and sales capacities. If you’re new, worry about PPAs later.
How Will it Affect Your Potential Customer Base?
If you’re ready to ready to work with a PPA company The huge benefit of the PPA is that it opens up a huge market that was otherwise inaccessible for solar integrators. Why? Before PPAs, solar customers were limited to people who had about $40,000 in cash or equity that was accessible in their homes. This is a small market. PPAs opened up the market to customers who own their properties and have $1,000 for a down payment. That is a huge increase in your potential market size.
If you’re located in a market that has plenty of customers with $40,000 cash or home equity, you may not need to partner with a solar PPA company to sell a lot of jobs. However, if you’re operating in a market where most of the home owners only have a few thousand dollars, offering a PPA will likely help your customers and your business to grow.
The question then arises, if you come across a customer that has $40,000 in cash or equity in their home but wants a PPA, how should you advise them as a solar contractor?
It’s important to remember that home owners are investing in solar to get the best possible return. So, which investment will receive a better return? In Massachusetts, when solar is installed on a quality site, the returns will tend to be well over 10% for the life of the system (I’ve seen them as high as 15%) with very little risk. You can’t find that return on the stock market. Why? With residential electricity prices around $.12 kWh and a floor SREC price in Massachusetts of $.30, a homeowner is guaranteed to get $.42 for every kWh produced by their solar array. That is a lot of money.
If a solar PPA company owns the array, they also own the SRECs it produces. What will the yield of a $5,000 down payment for a solar system owned by a PPA be? Although it’s hard to put a specific number on it, I would assume it is less then 10 percent. Why? Simply put, the PPA needs to make money. They make money on the spread between their cost of the capital and the revenue they are collecting from the electricity payment (from the homeowner) and the SRECs it is generating.
I reached out to Tom Konrad, Editor at Alt Energy Stocks to get his perspective and asked him if it’s possible for solar PPAs to have a higher return then 100% ownership as the homeowner would see it. While Tom admits he is not a PPA expert he has spent some time looking at the economics. He responded, “The bad reasons for their claim would be assumptions around your cost of capital (maybe they assumed you're financing with a credit card) or perhaps they assume that there will be no electricity price inflation. Finally, they could assume that you will sell your house in less than 10 years and not be able to recoup the cost of the PV. Any of these could vastly understate your IRR of PV ownership, or overstate the IRR of a lease.”
I spoke with Susan Wise who works with SunRun and asked her about how the IRR differs between ownership and leasing. While SunRun fully admits that they only operate in markets where they can offer a competitive return for homeowners, I wanted to know how it compares to ownership. Susan stressed that its difficult to say exactly, as the yield of a SunRun system will depend on specific market conditions. She did explain, "It’s safe to say that in California, if you have a $200+ electric bill and a decent roof (meaning it faces southward as much as possible and has minimal shading) - the IRR on a $1,000 upfront payment for SunRun Total Solar Low Upfront will return between 10-25 percent over 20 years (assuming a five percent utility rate increase). Of course if it’s $0 upfront (which it is in many cases), then the IRR is much more (infinite in fact because you invested nothing to begin with). And you start seeing it right away."
Many times the choice will be clear, the homeowner has or does not have the ability to purchase a solar system outright and thus they may need a PPA if they want solar.
Bottom line, if you’re working with a customer that has plenty of cash but is willing to use a PPA, run the numbers of both scenarios and see what the best invesment will be for the homeowner. The results will vary by state and utility provider. The best decision that you, the solar contractor, should provide to the consumer will be based on a number of factors that will determine the best investment:
Chris Williams who works with HeatSpring Learning Institute delivering world-class IGSHPA Geothermal Training, NABCEP Solar Training, and BPI Certification training to professionals who are installing, designing or selling renewable energy systems. Sign up for their newsletter here. Chris can be reached directly at firstname.lastname@example.org
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