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Understanding PPAs and Their Role in Solar Tax Equity Partnerships
Key Takeaways
A PPA allows an offtaker to buy solar power without bearing the costs or responsibilities of system ownership.
Tax Equity Structures often finance and hold ownership interests in these solar projects, with PPAs serving as the main revenue source.
Reduced Risk & Predictable Costs: The offtaker enjoys predictable electricity rates at lower cost, while the project owners gain a reliable revenue stream from long-term agreements.
Win-Win for Sustainability: PPAs make it easier for people and organizations to access clean energy and meet their environmental goals.
Introduction
In today’s world, many people and organizations are looking for ways to access clean, renewable energy—especially solar—without getting bogged down in high upfront costs or the ongoing technical demands of system ownership. One popular way to do this is through a Power Purchase Agreement (PPA).
This guide will walk you through what a PPA is, how it benefits those who buy solar electricity (often called the “offtaker”), and how PPAs are linked to tax equity partnerships and the benefits they offer to those holding ownership interests in solar projects through such partnerships.
What is a PPA?
A Power Purchase Agreement is a long-term contract in which one party (the offtaker) agrees to buy electricity generated by a solar project for a specific duration (usually 15-40 years). The solar project itself is developed, owned, and operated by another entity (often called the solar developer). Let’s clarify these two roles in simple terms:
Offtaker: This is typically a homeowner, business, or sometimes a public institution. The offtaker agrees to purchase the solar energy produced at a set price.
Solar Developer: This is the party that arranges the financing, builds the solar system, and takes care of its ongoing maintenance.
Under a PPA, the offtaker doesn’t usually pay much, if anything, upfront for the equipment. Instead, they pay only for the electricity they use. The solar developer remains responsible for the system and any related operational tasks.
How Does It Work?
System Setup The solar developer installs a solar energy system—often on the offtaker’s property or at another suitable location.
Electricity Pricing The offtaker buys electricity at a predetermined rate, which can be a fixed price or a price with a small annual increase. This rate is often 20-40% lower and grow slower than the local utility’s electricity rates.
Maintenance & Performance The solar developer handles day-to-day upkeep, such as monitoring the panels and ensuring everything runs smoothly. The offtaker doesn’t need to worry about repairs or system performance.
Contract Length PPAs usually last between 15 to 40 years, though the exact term can vary. When the contract ends, the offtaker and developer may agree to renew the PPA, purchase the system outright, or remove it.
Benefits for the Offtaker
Cheaper Electricity: PPAs often lock in an electricity rate at or below the local utility’s retail rate. This means the offtaker will pay less for power compared to traditional sources.
No Large Upfront Cost: One of the biggest hurdles in going solar is the initial expense of panels, inverters, and installation. Under a PPA, the project entity covers these costs, allowing the offtaker to enjoy solar power without a substantial initial payment.
Predictable Budgeting: PPAs typically feature a fixed or predictable rate structure, helping the offtaker plan more accurately for their future energy costs.
Minimal Maintenance Responsibility: Maintenance, system performance, and equipment repairs often remain the responsibility of the project entity, freeing the offtaker from the complexities of solar system ownership.
Environmental Advantage: By sourcing power from solar, the offtaker directly contributes to reducing reliance on fossil fuels and achieves tangible sustainability goals.
Where Tax Equity Comes In
Beyond the offtaker and developer, there can also be tax equity partners involved. Tax equity partners typically co-own the solar project through a special-purpose partnership. Here’s how it fits together:
Ownership Structure: The partnership (which includes the tax equity partner and developer) owns the solar project.
Revenue from the PPA: The off taker’s payments for electricity flow into the partnership, creating a steady income stream that is typically 3-7% of the project value.
Tax Credits & Depreciation: Usually tax equity partner in the partnership takes 99% of all the federal tax credits and depreciation benefits linked to the project.
Cash Flow & Allocation: The partnership covers system expenses (like maintenance) and then allocates any remaining revenue, along with tax attributes, according to the partnership agreement.
By combining a PPA with a tax equity setup, the solar developer and tax equity partner can create a structure that leverages both the steady income from energy sales and any applicable tax advantages available in certain jurisdictions.
About Valur
We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors.
From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!
Mani is the founder and CEO of Valur. He brings deep financial and strategic expertise from his prior roles at McKinsey & Company and Goldman Sachs. Mani earned his degree from the University of Michigan and launched Valur in 2020 to transform how individuals and advisors approach tax planning.
