Money, contracts and financing
PPA (power purchase agreement)
Also known as: Power Purchase Agreement, energy purchase contract.
Definition
A PPA (Power Purchase Agreement) is a contract in which a third party installs and operates a solar system at your site and you pay only for the energy generated, with no up-front investment. It is common on business projects.
Sources: Ley 1715 de 2014 (Renewable Energy Law) (opens in a new tab)
The division of roles is the defining feature: the investor puts up the capital, installs, operates and maintains the system, and takes on the technical risk; you provide the roof or land space and commit to buying the energy generated at an agreed tariff, normally below the grid tariff and with an agreed escalation formula. Ownership of the system is not yours during the contract.
The obvious appeal is entering with no up-front outlay and no operation to manage. The trade-off is a long-term commitment — PPAs are usually signed for a good many years — and a lower saving per kWh than buying the system, because part of the benefit remunerates the investor. The tax incentives also usually sit with whoever owns the asset.
The clauses most worth reviewing are the tariff escalation formula, the term, the option and price for early purchase of the system, what happens if you sell or leave the property, who is responsible for maintenance and what availability guarantees the operator offers. A PPA is a long-term energy contract, and it should be read as one.
The essentials of PPA (power purchase)
- No up-front investment: the third party finances, installs and operates.
- You pay for energy consumed at an agreed tariff, not for the equipment.
- The system is not your property during the term of the contract.
- Critical clauses: term, tariff escalation, purchase option and exit.
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Frequently asked questions about PPA (power purchase)
Is a PPA suitable for a home?
In practice it is a structure aimed at business and industrial consumption, where the volume justifies the contractual structure and the investor's risk analysis. For a household, the usual alternatives are an outright purchase or a loan.
What happens if I sell the property with a PPA in force?
It depends on what was agreed. Contracts usually provide for assignment to the new owner or an early purchase option for the system, but the terms vary. It is one of the clauses to read carefully before signing, not when the sale comes up.
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