|Focus:||The Australian solar photo-voltaic market|
|Services:||Property & Projects|
|Industry Focus:||Energy, Resources & Infrastructure, Property|
With the dramatic drop in panel prices over recent years and the largely saturated state of the residential market, the case for commercial solar photo-voltaic (PV) project development is both compelling and immediate. In our previous article we suggested that the integration of solar power is becoming an increasingly relevant consideration in the commercial leasing sphere.
The article also discussed the need for Power Purchase Agreements (PPAs), and how such agreements are an integral component of achieving bankability for most solar PV solutions. This article continues the discussion, looking at what PPAs involve and what is required to convince electricity retailers to sign up.
Those entering into commercial solar PV PPAs can broadly be classified into three distinct categories:
- net users
- lease PPA users
- mixed use clients
Net user clients
At the outset, it is important to distinguish between net and gross metering of electricity.
Gross metering requires properties to sell (or export) the output from their rooftop solar PV system to the grid operators (retailers or network service providers), and buy it back at a higher price. These arrangements put the seller at a disadvantage because retail energy suppliers source energy very cheaply from solar PV system owners and oblige them to buy it back at inflated retail prices.
A net user uses power generated from a solar PV system only for internal consumption, rather than exporting to the grid. The net user's electricity demand will almost always outstrip the PV capacity of the commercial rooftop, thereby minimising exports to the grid. A net user is typically a building owner/occupier or an owner with several tenants or lease customers. Examples include high-rise commercial, mixed use commercial, multi-story commercial, industrial and mid to high-rise residential.
Gross tariffs were popular in some Australian states at the height of the inflated feed-in tariffs, because householders received a premium price for every kW of solar they produced. With the dramatic winding back of feed-in tariffs in recent years, net metering has been introduced, effectively allowing properties to use solar PV as a hedge against rising electricity prices by using the electricity they produce to reduce the power they require from the grid.
Lease PPA clients
A lease PPA commercial client is typically a building owner, but can also be a long-term lessee. This client is not interested in electricity consumption from a PV system but rather turning what is an inert asset (e.g. a roof-space) into a revenue producing asset. PPAs, of course, include grid connection and are highly reliant on the electricity retailer and/or wholesaler. Funding is often investor or vendor driven with ownership in (or close ties to) an electricity retailer.
Mixed use clients
A mixed use PPA client uses (or on-sells to lessees) the electricity produced from a PV system, as well as selling excess production to an electricity retailer/wholesaler. Mixed use clients currently outnumber other user categories (in both residential and commercial property sectors) and exhibit a wide variety of customer types and energy profiles.
Considerations for PPAs
Commercial solar PPAs will need to (at least) address the following issues:
- Term and contract period: most solar PV projects involve multi-year time frames; those involving leasing models (with no upfront cost) will typically require a retailer to sign up for at least 10 years.
- Authorisations and title: the PPA will need to clearly articulate the rights of both the seller and buyer of electricity in respect of the long-term occupation (and use) of the roof on which the panels are located.
- Warranties: buyers will always want to know and be comfortable with the rated warranties (and any related performance guarantees) of the panels.
- Metering: in addition to standard electricity metering arrangements, many PPAs will involve check-metering solutions which can be turned to in the event of a dispute over monthly readings.
- Billing and payment: the majority of PPAs will involve monthly billing arrangements. These need to be carefully drafted and include appropriate dispute resolution clauses.
In addition to the above, a number of optional clauses may be included. These include a possible sale of the PV system to the buyer prior to expiry of the contract term, the right to assign or transfer the system, dealing with security interests under the Personal Property and Security Act 2009 (Cth) and any relationship with external project financiers.
Storage and time-of-use tariffs are also key matters for consideration. Battery and related solar storage technologies are progressing rapidly down the cost curve and, depending on the application, kWh tariff, location and level of subsidy, are quickly becoming viable options. Considering storage when constructing a PPA will be essential to delivering bankable PPAs so as to maximise charging battery banks during off peak rates and selling/using the stored energy at peak rate times.
The Queensland Competition Authority has recently recommended a further 21% rise in retail electricity prices this year. 1 Adoption of such a recommendation by the Queensland State Government would only serve to bolster the business case for solar PV project development in the "sunshine state".
PPAs play a central role in facilitating the requisite finance and providing a level of trust and certainty in the market. Well drafted legal documentation (including the PPA itself, any associated leases or licences, and where applicable, finance documentation), combined with a properly designed, installed and maintained commercial solar PV system, creates a packaged solution destined for significant market capture.
1Queensland Competition Authority. 'Fact Sheet 2013–14 electricity prices' (May 2012).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.