In the early 2000’s, when solar energy was a rounding error, Jigar Shah of Sun Edison, figured out how to make a long standing energy financing mechanism – the Power Purchase Agreement PPA – profitable for solar energy. The rest is history. Enjoy reading an overview of the backstory from a 2009 article titled Selling the Sun in Onearth Magazine by Michael Behar excerpted below.
“For Shah’s part, he didn’t invent any groundbreaking technologies. He just repackaged ones that already existed and convinced people to buy them. SunEdison customers pay nothing for their solar systems. That’s right, zero. Instead they sign what is known as a power-purchasing agreement, or PPA. These agreements are commonplace in the coal, oil, nuclear, and natural gas industries (the Hoover Dam was financed in part with PPAs). But Shah figured out how to make PPAs profitable for solar, something that nobody had been able to do before. When SunEdison installs a solar array, the customer agrees under a PPA to buy the electricity it produces at a set price for at least 10 years. “When we priced out owning the system ourselves, it didn’t make sense,” Buckley tells me. “We wanted a way to establish price certainty in a volatile market. SunEdison gave us a long-term hedge against that price uncertainty. We’re paying less for electricity and reducing our carbon impact. And 15 years down the road, when the price of electricity is higher, the savings will be even more attractive.”
A spokeswoman for the Kohl’s department store chain, which has SunEdison arrays on the rooftops of 67 of its stores, puts it this way: “There was no capital investment, and Kohl’s pays a fixed, predictable rate for its electricity that is less than the local utility rate. This gave us an important hedge against escalating energy costs.”
The average solar installation produces enough power to meet between 10 percent and 20 percent of a typical big box store’s annual energy needs. That may seem small, but traditional electricity pricing — in which power purchased from the grid during peak-demand hours commands a premium — works in a solar user’s favor. A solar array reaches its maximum potential between noon and 4:00 p.m., supplying more than 75 percent of a store’s daytime energy consumption and dramatically reducing the need for grid-supplied electricity when it is most expensive. “Peak demand charges might represent a third of our bill,” says Buckley of Staples. “So the savings really add up fast.”
Once Shah has locked in customers through PPAs, he can then approach banks, investment firms, and private backers to borrow money for building new solar systems, using those PPAs as collateral. Revenue collected through PPAs goes directly toward repaying SunEdison’s lenders, who earn a tidy return on their dollar, pocket city and state solar rebates, claim an accelerated depreciation benefit, and take a federal investment tax credit, a whopping 30 percent write-off. Banks, in turn, pay SunEdison a development fee and cover the cost of monitoring and servicing the installations for the duration of each PPA. Mark Cirilli, managing director of MissionPoint Capital Partners, one of the first venture capital firms to invest in SunEdison, says, “They simplified solar and made going green easy and cost-effective — a real win-win.”
Solar is reliable and robust, and by selling it through PPAs, Shah has created something the market finds irresistible: clean, renewable energy with no up-front equipment costs, packaged as the kind of rock-solid, low-risk investment that banks love.“