Roosevelt Institute | Cornell University

Harnessing Solar Power Through Third-Party Power Purchase Agreements

By Alex FieldsPublished October 21, 2014

Solar power is becoming increasingly cost-competitive with traditional energy sources in the United States. As policymakers remove subsidies for solar power, they must also ensure that solar will be able to thrive in the new energy economy. Removing policy barriers, especially restrictions on third-party power purchase agreements (PPAs), is essential.

By Alex Fields, 10/21/14

Solar power is currently enjoying a period of unparalleled growth, largely driven by cost decreases for photovoltaic (PV) cells and modules. Frost and Sullivan, an energy market research company, recently produced a study indicating that global solar energy usage will more than quadruple by 2030. Similarly, the International Energy Agency (IEA) released reports last week championing the potential of solar power to satisfy global energy needs. By 2050, PV solar could provide 16% of global electricity while thermal solar could provide 11% of global electricity.

Cost decreases have enabled solar power to become increasingly competitive with other energy sources, approaching grid parity. While utility companies are being pressured to harness more solar power, there are still some barriers in place holding up solar power's progress.

Most problematic is the unwillingness of many states to codify third-party power purchase agreements (PPAs). EPA's Green Power Partnershipdefines a PPA as "a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its roof or elsewhere on its property and purchases the system's electric output from the solar services provider for a predetermined period.

According to the Database of State Incentives for Renewables and Efficiency (DSIRE), only 22 states (Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Vermont) as well as the District of Columbia and Puerto Rico currently allow PPAs. Meanwhile, six states (Florida, Georgia, Iowa, Kentucky, North Carolina, Oklahoma) have legal restrictions on PPAs; the remaining 22 states (Alabama, Alaska, Arkansas, Idaho, Indiana, Kansas, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Virginia, Washington, West Virginia, Wisconsin, Wyoming) have unclear stances about the status of PPAs.

States allowing PPAs have enjoyed tangible economic benefits from increased solar production. In 2013, third-party solar financing generatedmore than $3 billion, facilitating the development of many new installations. Host customers receive stable and less expensive electricitycompared to traditional utility rates from solar services providers, rather than the PV system itself. They avoid large up-front costs as well as complex design and permitting processes. Meanwhile, providers take advantage of more tax credits and income generated from selling electricity.

There are still challenges surrounding PPAs, including with legal definitions that mandate that public electric utilities can be the only sellers of electricity, as well as determining whether third-party operators can do net metering. Though they may be formidable policy barriers, they have been overcome in states that allow PPAs by altering their legal codes. To ensure solar power's robust future growth, state legislatures should explicitly permit third-party solar operators to engage in PPAs, and be able to directly provide electricity to their customers.  This will ensure that the United States' energy future remains bright.