The North American PPA Market Is Recovering and Getting Ready for Massive Changes | PVGroup

The North American PPA Market Is Recovering and Getting Ready for Massive Changes

By Al Velosa & Jim Hines, Gartner

Introduction

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.

 The North American PPA Market Is Recovering and Getting Ready for Massive Changes | PVGroup

Overview

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

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