The North American PPA Market Is Recovering and Getting Ready for Massive Changes
By Al Velosa & Jim Hines, Gartner
The power purchase agreement (PPA) has become a popular acquisition model for photovoltaic (PV) solar energy in North America. Utility, enterprise and residential customers are increasingly turning to PPAs as a way to obtain the benefits of PV-generated electricity without the capital investment and operational requirements associated with ownership of the generating asset. PV vendors targeting the North American market must understand how the PPA landscape is evolving if they are to develop effective go-to-market and partnering strategies.
In a solar PPA, utilities, commercial and non-profit enterprises and residential end users buy solar PV-generated electricity from a third party, normally not a utility, in contracts that last up to 25 years. The key services that the solar PPA firms provide are financing, designing and building and operating a PV system for the user. Renewable energy credits normally belong to the owner of the PV system, but may be bought by the end user.
The feed-in tariff (FIT), which is popular in Europe, has led many solar PPA firms there to sell energy directly to local utilities. In North America, solar PPA providers have focused on residential and enterprise users, and are just starting to sell to utilities. The main benefit of a solar PPA for North American enterprises is saving money relative to utility rates, without a large capital expenditure for a PV system. The electricity rates from solar PPA vendors are comparable to the rates from utilities — from all sources.
Gartner estimates that major North American solar PPA vendors have over 400 megawatts (MW) of PV systems under management. This market is still evolving, and the relative positions of the vendors will continue to change. SunEdison is currently the largest PPA vendor in North America. Gartner forecasts the North American market for PV solar systems under a PPA contract or a FIT contract will reach 2.9 gigawatts (GW) in PV generation capacity in 2013, for an estimated $8 billion in capital expenditure.
The PPA market and the key players have naturally divided into the three main market segments of utility, enterprise and residential. Each of these segments has different requirements for the solar PPA vendors serving them with respect to the sales and financing process. Due to the relatively high cost of PV systems, these markets and their solar PPA vendors are dependent upon incentives from the federal, state or provincial, local governments as well as from individual utilities.
No one business model has yet to prove itself in the market, with PPA providers experimenting with full service offerings and going all the way to completely outsourced models. However, there is a trend toward outsourcing more and more activities.
North American Market Place
Gartner estimates that major solar PPA vendors have over 400 megawatts of PV systems under management in North America, as of June 2010. Figure 1 shows the top 5 PPA contract vendors account for half of the fleet of PV systems under management. The market is still evolving and thus continues to show volatility in the rankings; so we expect to see this evolve significantly over the next year.
Figure 1. Top 5 Solar PPA Vendors, North American PV Energy Contracts Under Management (Megawatts)
Source: Gartner (June 2010)
Challenges and Opportunities
In the near to midterm, Gartner expects the solar PPA market to remain extremely competitive and volatile. After obtaining financing, execution will be the most critical issue for most solar PPA firms. Key differentiators include:
- Finance — The most critical differentiator.
- Project Development and Sales — Since no solar PPA firm can have a sales force that covers all opportunities, this requires a clear direct sales and channel management strategy.
- Engineering, Procurement and Construction (EPC) — An effective EPC arm or set of partners will become an increasingly important factor as pricing becomes even more competitive.
- Operations & Maintenance (O&M) — Will determine the profitability of projects in the long term
- Technology — Once a firm has a set of bankable PV partners, the focus here turns to how to ensure that the long term performance of their systems meets stated goals.
There is a growing market for the electricity from solar sources under contract. Gartner forecasts the North American market for PV solar systems under a PPA contract or a feed-in-tariff contract will reach $7 billion to $8 billion in capital expenditure by 2013. Yet there are signs in the horizon about a change in character and direction of the market.
- The core utility market remains ambivalent about the purchasing model it will use for solar systems. The tendency currently appears to be a mix of purchase and energy contracts. Yet as the model expands across the USA, utilities may tend to buy PV systems to ensure they are under their utility commission’s asset rules.
- California has been the core market to date, but the incentive structure for large commercial PV systems from the California Solar Initiative has recently been reduced to the point where few firms will offer PPA contracts to commercial, municipal or non-profit entities. PPA contract vendors will focus their resources in other states or the utility market, since they can get better returns in those markets.
- Traditional energy industry firms, particularly independent power producers are increasing their presence in the market. Due to their scale of operations and access to internal funds, they may increasingly win projects on a national and international scale.
In this environment, vendors in the space are ramping up the competition with strong efforts to obtain financing while refining their competitive strategy on two core fronts. First, they are aligning themselves with the core market segmentation – which may require that the firms bulk up significantly to deal with large utility customers and large IPP competitors. Secondly, they will continue to hone their sales channel strategy. Firms focused on the utility market will need to bulk up in size. This is to ensure that their finances and their direct sales strategy align with the longer sales and project development cycles that we are encountering.
SEMI PV Group – The Grid, August 2010