A power purchase agreement, also commonly known by the acronym PPA, is a popular method that is effective for businesses that are looking to go green without the need for capital expenditure. The equipment is financed and installed by the third party and in return the customer will agree to purchase all electricity that they consumed from the green energy equipment at a discounted rate for a pre-determined contract length which is often greater than 10 years. This means that you will be cash positive from day-one simply by purchasing cheaper electricity from the on-site generation compared to the grid.
The other key difference between a PPA and asset finance is that the equipment is owned, maintained and operated by a third party. This allows the customer to avoid the risk and complexity of equipment ownership and operation. If the equipment doesn’t operate then you will not pay for any of the generations and you will be no worse off than if the equipment was not installed on the site.
As the equipment is owned and operated by a third party, it is possible that the solution can be an off-balance sheet financing solution which adds to its attractiveness to some customers. Please note that the balance sheet position is ultimately determined by your auditors and can’t be guaranteed.
The main drawback to this option is that as the third party is taking more risk, the total amount you will end up paying for the system will be higher over the life of the project.