How power purchase agreement (ppa) works when a business funds solar
A third party funds, installs, insures and maintains the system on your roof at no cost to you, and you sign a long-term agreement to buy the electricity it produces at an agreed price per unit, normally well under your grid rate. Your energy bill falls from day one with nothing spent up front. Because the funder owns the kit, they receive the tax relief and any export payments, and you commit to a long contract, so the discount and the exit terms matter more than the headline saving. It is the simplest way to get solar working now if you cannot or would rather not commit capital.
Solar with no capital, in plain English
A Power Purchase Agreement is the answer for a business that wants cheaper power now but cannot, or would rather not, spend capital to get it. You do not buy an array; you buy the electricity it makes. A funder pays for the system, installs it on your roof or land, owns it, insures it and keeps it running, and you sign a long agreement to buy the power at an agreed rate per unit, set below what the grid charges you. Your energy bill falls from day one with nothing spent up front. What you give up in return is ownership, and with it the tax relief and the larger lifetime return that come from owning the asset yourself.
How the money works
The funder sizes the system to your on-site demand, because a PPA earns from the power you actually use, not from what is exported. You are billed for metered generation, usually monthly, at the contracted rate. On-site PPA rates are deal-specific but typically sit well below a 2026 business grid price of roughly 26 to 32p a unit, which is where the saving comes from. Terms run long, commonly 10 to 25 years, to let the funder recover the capital and its margin, and most contracts carry an annual escalator that lifts the unit rate each year. That escalator, not the headline rate, decides how good the deal looks a decade in, so it deserves close reading.
Tax, ownership and the balance sheet
Because the funder owns the system, the funder keeps the capital allowances and any Smart Export Guarantee income. Your payments are an operating cost, treated like any other electricity bill through the profit and loss account. It is worth being clear about what you are handing over: an owner would claim the Annual Investment Allowance for 100 per cent first-year relief up to £1m, which covers most installs, and solar being special-rate means it never qualified for full expensing anyway. A PPA passes all of that to the funder. PPAs are usually structured to sit off balance sheet, but whether that holds depends on the contract and your framework under IFRS 16 or FRS 102, so confirm it rather than assume it. This is general information, not advice.
Who it suits, and what to check
A PPA fits a business with steady daytime demand, a long stay in the building, and a preference for keeping cash and maintenance risk off its plate. It is the lowest-return route of the seven, precisely because you never own the savings, so weigh it against ownership using the finance calculator before committing. Read the exit and buy-out clauses carefully, and check what happens if you sell or vacate the premises mid-term, because the agreement usually travels with the property. Once you understand the structure, the next step is a rate for your roof; see how a PPA compares with owning and take it from there.
Pros
- No capital outlay at all
- Cheaper electricity from day one
- The funder carries maintenance and performance risk
- A predictable, budgetable energy cost
Trade-offs
- The lowest lifetime return because you never own the savings
- A long contract to live with
- You forgo the tax relief and export income
- Buy-out and early-exit terms need careful reading
Once you understand how a PPA prices your power, the next step is a real per-unit rate for your roof: request a costed PPA quote. Still weighing this against the alternatives? Line every funding route up side by side before you decide.