Solar PPA Explained How a Power Purchase Agreement Works for Commercial Businesses

The three parties

A commercial solar PPA involves three parties: the commercial business (the offtaker), the solar funder (the system owner), and the solar installer. In Caledonia Solar’s model, we act as the originator and manager of the project – engaging both the funder from our panel and our accredited installation partner.

What the funder provides

• Full funding for the design, procurement and installation of the solar system
• Ownership of the system for the duration of the PPA term
• Insurance and maintenance responsibility for the system throughout the term
• Performance monitoring and reporting on generation output

What the business provides

• A roof licence or lease granting the funder the right to install the system
• A commitment to purchase the electricity generated at the agreed PPA rate
• Access to the roof for maintenance and monitoring purposes

What the business receives

• A fully installed solar system at zero capital cost
• Electricity at a contracted rate below the current grid tariff – from day one
• Zero maintenance responsibility – the funder manages and insures the system
• Documented renewable generation data for sustainability reporting

The financial logic of a PPA is straightforward. The business currently pays for all of its electricity at the grid tariff. Under a PPA, electricity generated by the solar system is purchased at a PPA rate that is set below the grid tariff at the point of contract. The saving is the difference between the PPA rate and the grid rate, applied to every unit of solar electricity consumed.

A typical commercial PPA rate in Scotland is set 10–25% below the prevailing grid electricity tariff at the point of contract, delivering an immediate and contractually guaranteed saving from the day the system is commissioned.

PPA rate escalation

Most commercial solar PPAs include an annual escalation clause – typically 2–3% per year – applied to the PPA rate over the contract term. This means the PPA rate increases each year, but so does the grid electricity tariff against which it is compared. A well-structured PPA maintains a positive saving against the grid rate throughout the term even with escalation applied. Caledonia Solar models and presents the full escalation schedule before any agreement is signed – there are no hidden increases.

Exported generation

Solar systems generate electricity that the building may not always be able to consume immediately – particularly during periods of low occupancy. Electricity that is not consumed by the building is exported to the grid. Under a PPA, exported electricity is typically managed by the funder, who receives the Smart Export Guarantee (SEG) or grid export revenue. This is separate from the PPA payment made by the business, which covers only electricity consumed on-site.

A PPA is the right funding structure for businesses where one or more of the following applies:

• Capital preservation is the priority – the business does not want to deploy capital in solar when it can be used in core business activity
• The building is leasehold – the tenant cannot own a permanent asset on a property they do not own
• The building owner and occupier are different parties – a PPA can be structured with the funder holding a roof licence from the landlord
• The business has limited access to asset finance – a PPA does not appear on the balance sheet as debt
• Simplicity of outcome is valued – no maintenance responsibility, no performance risk, no capital commitment

A PPA is generally not the right structure for:

• Businesses planning to sell the building within the PPA term – the PPA obligation must be transferred or terminated
• Businesses whose lease term is shorter than the minimum PPA term – typically 10 years
• Businesses that want to own the solar asset and benefit from capital allowances

For Scottish businesses where capital is constrained, a leasehold complication exists or maintenance simplicity is a priority, a PPA is often the fastest route to realising solar savings – with no internal approval process for capital expenditure required.

• What is the PPA rate and how does it compare to my current grid tariff?
• What is the annual escalation rate, and how does the PPA rate compare to the grid tariff in years 5, 10 and 15?
• What happens if I want to sell the building or exit the lease before the PPA term ends?
• Who is responsible for maintenance, repair and replacement of the system during the term?
• What happens to the system at the end of the PPA term – can I purchase it, extend the agreement or have it removed?
• Who receives the Smart Export Guarantee income from exported electricity?
• What performance guarantee is provided – and what happens if the system underperforms?
• Is the funder financially stable and able to honour a 20+ year commitment?

Caledonia Solar provides detailed answers to all of the above questions as part of the PPA proposal process, before any commitment is requested.