Solar Power Purchase Agreements (PPAs) and Their Benefits for Commercial and Industrial Clients in South Africa
In South Africa, 56 % of electricity consumed in 2019 went to industrial clients, and the majority of this was generated from CO2 emitting fossil fuels. With rising electricity tariffs, companies are also constantly on the lookout for ways to cut down on their energy bills and reduce their carbon footprint. Solar energy is one readily available solution to this dilemma, often requiring a sizable capital outlay to generate the lucrative investment returns for the business owners in the long term. This is where Solar Power Purchase Agreements (PPAs) come in, offering end-clients and investors the opportunity to reap financial, environmental and other benefits from this route to generate and store clean green renewable energy on business premises.
Source: PV Magazine
What Are Solar Power Purchase Agreements (PPAs)?
Solar energy is winning over more and more across the globe, right from the national utility-scale projects all the way down to the individual household level. The benefits of this renewable energy source have been spoken of often (Read our previous blog post on this: ZPE Blog: Solar PV’s Ever Increasing Role for SA Business & Industry) – In summary, solar power is cheaper than fossil fuel energy in the long-term. Solar power is also cleaner and does not contribute to greenhouse gas emissions.
Getting started with a solar PV and battery storage setup takes a few steps. The individual or business needs to conduct a thorough analysis on electricity requirements based on operational patterns, and research various types of solar power and/or battery storage configurations to determine the best engineering solution to meet their requirements. Thereafter, the solar PV system must be installed and the new electricity supply connected. After the installation process is complete, there will be some routine maintenance requirements over the lifespan of the solar PV system.
For some potential solar clients, the process of getting setup may seem lengthy and complex. While there are many experts they can rope in who can assist along the way with planning, installation, and maintenance, ultimately the responsibility of ownership remains with the client. Solar PPAs provide an alternative arrangement for commercial and industrial clients looking for a simpler way to make use of solar power by outsourcing the entire project life-cycle to an expert 3rd party who will remain accountable and responsible for all phases of the project.
According to the US Environmental Protection Agency, a solar PPA is a financial arrangement between a third-party solar PV developer and a host client. The developer designs, installs, owns, operates, and maintains the solar PV system, while the host makes their property available to house the system, and buys electricity generated for a set time period. It is now also possible to couple solar PV technology with battery storage under a PPA offering due to the decreases in technology pricing and ever increasing utility tariffs that make the PPA business case viable. Solar PPAs are long-term agreements and can run for a period of typically 10-20 years.
In other words, commercial and industrial clients interested in generating solar energy onsite have two ways to go about it—they can either fund their own solar PV installation upfront or set up a PPA with an established developer.
Benefits of Solar PPAs for Commercial and Industrial Clients
Solar PPAs solve a number of distinct challenges for commercial and industrial clients. Many of these clients operate on a very large scale and sometimes have machinery running 24 hours a day, using large amounts of electricity. These are some of the obstacles they encounter as far as their electricity supply:
- High electricity costs with high annual tariff escalation
- Non-renewable electricity sources and their impact on the environment
- Dependence on electricity from national grid and power outages/ load shedding
- Complexity of ensuring an optimally running solar power installation onsite
By agreeing on a solar PPA, majority if not all these challenges can be resolved. This financial agreement between the developer and the client has these distinct benefits worth exploring:
- Cheaper electricity- To offset the increasing electricity tariffs, more and more residential, commercial, and industrial clients are looking at solar generation. A solar PPA has the added benefit that the client does not have to pay for the installation process, often with zero upfront investment costs, and once this is done, they can start buying cheaper electricity from day one of the system generating. The price of this electricity is fixed upfront for the duration of the PPA (with pre-agreed annual escalation rates often lower than the utility increases), and the client need only pay for the electricity they use. The graphs below illustrate the overall monetary savings potential in the long-term via a solar PPA compared to utility Eskom’s electricity tariffs
Source: Zero Point Energy project (Johannesburg client, 2022)
- Cleaner electricity- When the sun’s energy is used to generate electricity instead of fossil fuels such as coal, there is a significant reduction in the production of greenhouse gases and other harmful emissions. Solar PPAs allow companies to reduce their carbon footprints, and in many countries it allows them to monetize the CO2 savings either via reduction in CO2 taxes or via carbon credit trading/sales
- With solar PV coupled with battery storage technology, businesses have a means to counter load shedding or power outages that can result in large operational losses, business interruptions and general inconvenience. Incorporating battery storage in a solar PPA has the added benefit of allowing businesses to avoid needing to invest upfront in capital-intensive diesel generators that come with their own set of disadvantages such as noise, fuel costs, pollution emissions and maintenance costs.
- Decentralized electricity supply- Solar PPAs simplify the process of diversifying and decentralizing the electricity supply. With more companies generating some or all of their electricity onsite, this will significantly reduce the constraints that utility companies such as Eskom face to meet increasing electricity demand across the country. It allows the reduction of transmission related electricity losses on the grid that come about when electricity is transmitted over long distances, thus freeing up vital electricity that the utility can use to serve other customers closer to the point of their generation stations
- Ease of setup- When it comes to solar PV installation, many companies would much rather contract out this responsibility to another specialist company. There is no need to raise large amounts of capital, hire in-house solar energy experts, and skill up a team to manage the operations and maintenance of the solar system.
Other Considerations Concerning Solar PPAs
Businesses stand to gain a lot from entering into solar PPAs. These long-term agreements guarantee cheaper electricity for many years. It’s worth noting that the solar installation will increase the value of the property it is on. Although solar PPAs typically run for around 10 to 20 years, there are exit clauses in the agreements, which govern when and how the business client may pull out of the contract. This could be necessary when the property owner wants to assume ownership of the solar system earlier than the PPA term or sell their land before the PPA term ends. Often, ownership of the solar PV asset also transfers to the business owner at the conclusion of the PPA period, allowing him to benefit from the residual value of the asset for the remaining lifespan of its useful life. All of this grants flexibility to the owner thus ensuring a mutually beneficial partnership with the PPA provider for the long-term.
Example of Large-scale Solar PPA in Southern Africa
Here in South Africa, solar PPAs are becoming more widespread, with more companies wanting to reap all of the benefits of a large solar PV onsite, without the administrative and maintenance responsibilities it brings.
Source: IBC Solar
One example of a large-scale solar PPA locally in recent times is the 12-year agreement by private hospitals group Mediclinic in the latter half of 2021. The medical group will have solar PV installations at six of its hospitals, which will be managed by a sustainable infrastructure investment fund manager.
The Mediclinic group stands to benefit from this agreement because they will receive direct access to cheaper electricity on-site. The move will also help meet their sustainability goals by reducing their carbon footprint. The installation is set to generate 4,100,000 kWh/yr, but the Mediclinic group will not need to cover any of the installation and maintenance of this sizeable project.
Solar PPAs offer a lot of advantages to industrial and commercial clients looking to offset their high electricity costs and counter load shedding risks, with a cleaner, cheaper, and often more reliable source of electricity. The team at Zero Point Energy has many years of experience and in-house skills to deliver successfully across all phases of commercial and industrial scale solar PV and battery storage projects. We offer solar PV & battery storage PPA funding solutions to commercial & industrial clients in South Africa. Read more about this here: ZPE signs PPA offering partnership with global Renewable energy Funder.
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Contact Zero Point Energy today to assess, design, install and maintain your next fully-funded commercial or industrial-scale renewable energy, battery storage or energy efficiency project:
Zero Point Energy is a proudly South African sustainable engineering company that provides professional engineering consulting, turn-key project solutions and funding in the areas of renewable energy, energy efficiency, energy storage & backup power. The company is a 100% black-owned, 43% black female-owned company achieving a Level 1 BBBEE Contributor status, and has a passion to transform the energy industry without compromising on safety, quality and client satisfaction. Learn more about the company’s team here