While solar energy is freely generated from the sun, it is important to note that there are still costs associated with harnessing that energy. This article will explain the various costs and outline how exactly solar PPAs are charged.
Solar Power Purchase Agreements (SPPAs) are charged for each kWh generated by your system. You’ll receive a monthly bill based on how much energy you received from the system. Solar PPA contracts are typically anywhere from 7 to 25 years, short contracts have a higher cents per kWh charge, longer contracts have a lower c/kWh charge. There’s no upfront cost and at the end of the term you will usually end up owning the system. That’s great, but how is that c/kWh calculated? There are four main costs that make up your bill each month spread over the lifetime of the SPPA contract, installation, finance, sales and operation & maintenance (or O&M). And lastly, there’s profit - SPPA providers don’t only do this because they want to see a world powered by renewables, they’re viable businesses offering an alternative in the energy market.
Installation
The first is the installation cost, on a 15 year PPA, this will be around half of the c/kWh rate, it will be more over a shorter contract. Installation is made up of four components, the cost of the equipment (solar panels, batteries, inverter, controllers and current transformers (CT's) which provide a simple, inexpensive, and accurate means of measuring current flow. Typically this is about 40% of the installation cost. Then there’s the cost of the electrician to perform the installation, again another 40%.. The remainder is the profit for the organisation who manages the contract, one advantage of SPPAs is that this last cost is removed from the process, absorbed by the SPPA provider
Finance
The finance costs are the cost of money over time, the amount you’ll pay is usually less than if you were to borrow the money for an install. Any capital outlay paid upfront will have a cost of money component added to it, this is where the finance comes in. There’s two parts to this component, the first being the interest and the second being a fee for the total funds under management. SPPA providers are effectively fund managers, to cover their administration costs as opposed to the return the fund requires they charge a fee each year as a percentage of the price they paid for the SPPA, this can be anywhere between 0.5% and 1.5% each year. The return expected by the fund depends on the level of risk, A contract with a government tennant hosting the solar system may be charged as low as 5% and a small business may be as much as 15%.
Sales
Next is the sales cost. This involves the time it takes to understand your needs and design a solar solution that fits those needs and pay for all the analysis on deals that don’t go ahead! Everyone loves a sales person, not all proposals turn into installations, the conversion rate can be anywhere from 1:20 to 1:5 depending on how well targeted the lead generation operation is. Sales people will get between $80-$120 per kW installed - on a 99kW system that will be $8,000 - $12,000k for the sales person. The higher that is, the more the SPPA price will be, which in turn lowers the savings for the customer and makes it hard to sell.
Operation & Maintenance
The last and possibly most important part is the O&M component. This is the most significant difference between a SPPA and just paying for an installation, because the SPPA supplier only gets paid if the system is generating as expected, they will monitor it and be quick to repair it or carry out maintenance if it drops below expected generation. This is a benefit for the buyer of the energy - every kWh not purchased through the SPPA contract needs to be purchased from the grid - usually at a significantly higher cost.
The O&M is made up from:
PV and Inverter Replacement
Battery Replacement
Maintenance
Billing
Insurance
Monitoring software subscription
Internal Labour Cost and Overheads
The systems are monitored 24/7 with a rapid response to any issues. Compare this to an unmonitored system, it can be months before a low performing system is noticed from regular reviews of the bills. It’s not unusual for soiling, faults in the installation or equipment failure to cost a significant proportion of the savings expected from Solar. When the savings on a 99kW system are typically more than $25k per year, losing even 10% production is significantly more than the maintenance costs.
99kW Case Study
So considering all these factors, how might this look to you the consumer of the PPA? Below is a real example of a 99kW installation with a 15 year SPPA contract.
Figure 1. Solar PPA pricing (c/kWh) of a 15 year SPPA contract
How does that change if the contract is shorter? The overall rate goes up and the cost of the equipment and installation is a greater proportion of that amount, since the same amount is spread over a shorter period of time.
Figure 2. Solar PPA pricing (c/kWh) of a 10 year SPPA contract
And for a longer contract, the finance and O&M costs are a more significant proportion of the overall cost while the overall rate goes down.
Figure 3. Solar PPA pricing (c/kWh) of a 20 year SPPA contract
Energy Terrain
At Energy Terrain, we specialise in fully operating commercial rooftop solar so you can focus on your business. We are committed to ensuring you can gain access to a solar PPA that maximises your business' returns and meets your business' expectations. It is important to us to provide clarity with PPA pricing over the various terms so you can make the best decision for your business. For your free assessment, contact us today.
