In a solar power purchase agreement (PPA), utilities, commercial and non-profit enterprises and residential end users buy solar photovoltaic (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, 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.

• Government incentives in Europe have led solar PPA firms to sell energy to local utilities. In the U.S., solar PPAs focus on residential and enterprise users, and are just starting to sell to utilities.
• The main benefit of a solar PPA for U.S. 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.
• If greenhouse gas emissions reporting and renewable energy credits are important to your enterprise, they will be add-ons to the solar PPA contract and negotiated electricity rate.
• Startups, PV vendors, finance and construction firms — such as SunEdison, SolarCity and Solar Power Partners — have entered the solar PPA market.

• Develop a comprehensive energy plan before assessing PV systems. Maximize your savings by first auditing your energy consumption and implementing energy conservation programs.
• Evaluate solar PPA vendors in terms of the electricity cost savings they can give you today and in the future, as well as on their long-term viability. Once you determine the financial benefits, then assess the "soft" benefits of a renewable electricity source.
• Verify how your utility views PV systems, particularly from a net metering perspective. Review your solar PPA contract versus your utility rate structure to make sure that you will save, given your mix of time-of-use and demand charges.

Gartner has observed a "confluence" in the PV solar marketplace that calls to mind the metaphor of great rivers combining to create a larger, stronger torrent. We are seeing new business models emerge from industry subsectors that are themselves going through dramatic change. Gartner is in a unique position to observe this confluence given its scale of research, which covers PV systems, energy and utilities and facilities management (see Figure 1).

PV and semiconductor manufacturers, as well as semiconductor capital equipment manufacturers, find themselves in the front line of those facing the wave of interest in renewable energy. As they pursue options to drive revenue and diversify their customer base, they are looking at the energy industry's business models, the critical role of government incentives (and thus of government lobbying) and the importance of renewable energy sources.

In parallel, electricity consumers (both residential and enterprise) have shown increased interest in becoming a more active part of the process of generating, distributing and consuming power. This comes about because of a number of factors, but essentially it is the desire to be more in control and more active, a desire to be more environmentally responsible, and the opportunity offered by a more sophisticated grid design that allows power to flow two ways and enables consumers to source their own power. Gartner's energy and utilities group calls this the "consumerization of energy."

The final piece of this puzzle is the PPA model developed by the utility industry. PPAs have emerged as a tool for managing, under a contract, how much electricity is bought from solar generation sources. This financial construct does away with the capital investment needed for a PV system and turns it into a monthly electricity payment. It also reduces the variability and uncertainty that affected both provider (in terms of demand) and consumer (in terms of the price paid now and into the future).

Bringing these three concepts together has been an initiative led largely by vendors and financiers associated with the PV solar industry, as well as a few progressive utilities. It is a concept much more readily accepted and adopted by electricity consuming companies now since the idea of energy consumerization has taken hold. And the characteristics of PV solar lend themselves very well to this model, given the scale of electricity requirements for typical enterprises.

Driven by high energy prices, environmental concerns and favorable national energy policies, consumers — both residential and enterprise — are becoming more active in managing their energy efficiency and implementing their own renewable-generation resources. Up to 35% of new homes (see the Galvin Electricity Initiative [www.galvinpower.org ]) and 15% of existing homes (through retrofits) will actively participate in an energy efficiency program by 2015. The actual percentage of customers who will implement energy generation and storage technology on their premises will be a single-digit number. Yet even a relatively small number of "environmentally energized consumers," who go beyond energy efficiency programs and implement their own renewable generation or storage technology, will challenge the energy utility industry's processes, as well as traditional models of energy management and network operation. This will transform relationships between energy utilities and energy consumers.

Consumer implementation of energy technologies (such as energy efficiency systems, generation and storage), and their introduction to utility networks, is analogous to IT consumerization, the introduction of consumer-owned IT technology to corporate IT networks and applications that has occurred in the past decade. The IT industry learned how to live with and, ultimately, take advantage of it.

Energy companies have been slow to recognize changes in consumer attitudes and embrace consumers as significant contributors to energy sustainability and the debate about carbon dioxide emissions. Utilities have traditionally put a restrictive measure on the connection of customer-owned generation units to the grid, through a combination of financial barriers for distribution generation stakeholders, bureaucratic delays and the requirement for upfront money for studies and connection costs. Energy utility companies should learn from the IT consumerization phenomenon, and embrace best practices in determining how to deal with changing consumer attitudes toward deploying energy technology — and address them via an intelligent, "self-healing" grid.

Given this confluence of consumerization of electricity, PV systems and PPA models, Gartner estimates that, in 2008, solar PPA firms installed 93 megawatts (MW) of PV projects in the U.S., worth approximately $0.6 billion. Solar PPAs are used on a global basis. However, solar PPA enterprises in countries such as Germany and Spain can maximize their return on investment (ROI) by selling their solar-generated electricity to a local utility under the "feed-in tariff" scheme. So at the moment the solar PPA model for selling electricity to non-utility enterprises is concentrated in the U.S.

The retail sector is the largest U.S. market for solar PPA (see Figure 2), but customers range from farmers to retailers to airports. Retailer Kohl's is the largest customer, with over 60 PV installations with a capacity of 22 MW. The U.S. Air Force, working with Renewable Ventures, has the single largest U.S. solar PPA site to date, with 14 MW at Nellis Air Force Base, and Xcel Energy has the largest utility deployment at the moment, with a facility of over 8 MW of production capability. Other major solar PPA customers include Staples, JCPenney, Arizona State University and cities such as Los Angeles and Rifle.

The solar PPA model is a service model that enables the host customer to implement a PV solar electric system without the usual capital investment. The solar PPA firms install and own the PV system and sell the electricity to the end users under a long-term contract, typically 20 years. Beyond the electricity and the ability to make some "green" marketing statements, the four key services that solar PPA firms provide for end users are:

• Financing — Solar PPA firms fund the bulk of the costs for a PV system at a host site. So instead of residential or commercial end users having to worry about a large capital expenditure, they could focus on negotiating an electricity rate with the solar PPA firm — a rate that they could compare against their current utility's peak daytime rate. A key element of this contract is that they help end users hedge their electricity costs. Since the typical solar PPA contract is long-term, customers can negotiate low electricity rates with a lower growth rate than utilities' historical electricity price increases of between 5% and 6%. As you are negotiating your rate with the solar PPA vendor, keep in mind that the vendor generates its revenue by charging end users, obtaining incentives from the government and utilities, as well as by selling solar renewable energy certificates (RECs) — although the market and pricing for solar RECs in the U.S. is still nascent.
• Design — Given the host's electricity requirements, location and facilities, the solar PPA firms help end users understand the key elements of the PV system. This involves the selection of the best PV system type for end users (based on their energy use and budget), and a review of the design if the PPA vendor is working with a third-party designer.
• Build — Solar PPA firms provide the project management for these construction projects, whether on a residential or enterprise scale. They work with the design and integrator firms to ensure that the project is built to the quality and schedule promised. Solar PPA firms ensure that appropriate structural or geological tests are conducted and verify that appropriate remedial action is taken if needed; they may also obtain the building permits. They also take care of all the government and utility paperwork for their customers. In fact, this is a critical element, as the level of time that is required from an end user sometimes becomes the factor that inhibits the sale of a PV system.
• Operate — The solar PPA firm's most underrated benefit for end users is its clear interest in ensuring that the system delivers consistently on a long-term basis. Residential or enterprise end users may not notice, or may not quickly fix a system that is underperforming. Because the solar PPA firm's revenue stream clearly depends on the optimum performance of a specific PV system's electricity output, it will actively monitor these systems and ensure that regular maintenance schedules are followed.

Note that enterprises and residential users in a solar PPA will still buy electricity from the utility for those night and low-light times when solar systems are not generating power. Also note that when you negotiate rates with the solar PPA firm, you need to consider how your utility charges you for two key costs: time-of-use charges and demand charges.

Startups, PV vendors and established finance and construction firms have entered the solar PPA market (see Table 1). Startups include firms such as Recurrent Energy, SunRun and Tioga Energy. Established PV firms, such as SunPower, First Solar, BP Solar and Suntech Power, entered the solar PPA business as part of their sales efforts. Established finance and construction firms with divisions targeting this market include Wells Fargo, Morgan Stanley, enXco, Integrys, GE Energy, Honeywell and Dome-Tech (a division of United Technologies).

Enterprises need to consider both the benefits and drawbacks of solar PPA offerings before committing to a long-term contract agreement. Consider the factors in Table 2 for your decision process.

• Since 1970, U.S. electricity prices have risen by between 5% and 6% on an annual basis.
• In their attempts to increase revenue, PV cell and module vendors are investing in the financing of projects, by supplying materials and funding construction, as well as on a solar PPA basis.
• The focus of solar PPA vendors has shifted, from clarifying U.S. government incentives for PV systems to obtaining financial funding.

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"Dataquest Insight: Solar Module Manufacturers Will Turn to Solar Energy as a Service to Grow the U.S. Market"

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"Energy Technology Consumerization: Impact on Utility OT and IT"