A power purchase agreement is a deal to buy energy at an agreed price for several years.
It's known as a PPA. In a solar project, the party using the energy doesn't buy the panels: it pays for each kilowatt-hour it receives, and the system's owner installs and maintains it.
What it is and who's involved
A PPA turns a solar installation into a service: the customer pays for energy, not equipment.
The consumer
A shop, factory or building that uses the energy. It pays for what it receives, usually below the grid price.
The system owner
A company, often a vehicle created for the project, that finances and owns the panels. It's also responsible for their operation and maintenance through the contract.
The contractor
Designs and builds the system as agreed and within the agreed time.
The lender
Disburses the money for construction, when the project isn't paid for with equity alone.
The network operator
Authorizes and maintains the connection point. The grid keeps supplying what the solar system can't cover, such as the energy used at night.
The retailer
Settles the surplus that goes to the grid and shows it on the customer's bill.
How it works, step by step
- 1
It's sized and the contract is signed
The system's size depends on how much energy the customer uses, at what hours and how much sun the site gets. The parties agree on the term, the price per kilowatt-hour and how that price changes each year.
- 2
It's built and connected
A contractor installs the system and the connection is arranged with the network operator.
- 3
It's metered and billed every month
The meter records the kilowatt-hours delivered and the customer pays for them at the agreed price.
- 4
The contract ends
Depending on what was signed, the system may pass to the customer, be renewed or be removed.
A worked example in pesos
A made-up example: a shop uses 3,600 kilowatt-hours a month produced by a 30 kWp system, and its PPA gives a 20% discount on the grid tariff.
| For the customer, per month | From the grid | With the PPA |
|---|---|---|
| Energy (kWh) | 3,600 | 3,600 |
| Price per kWh (pesos) | 900 | 720 |
| Bill (pesos) | 3,240,000 | 2,592,000 |
The customer pays 648,000 pesos less per month for that energy.
| For the system owner, per year | Pesos |
|---|---|
| Energy income (2,592,000 × 12) | 31,104,000 |
| Operation and maintenance | −3,600,000 |
| Result before taxes | 27,504,000 |
If the system cost 130,000,000 pesos, that result would take about 4.7 years to recover the investment. It's a simplified calculation: it leaves out taxes, price indexation and the panels' loss of output.
That time is the payback, a first measure. To assess the whole project, calculate its return year by year.
What to check in the contract
These clauses change the result the most for an investor.
Term
Usually several years. Compare it with the time needed to recover the investment and with the equipment's useful life.
Price and indexation
Check whether the price is a discount on the tariff or a set value, and how it's adjusted each year.
Minimum consumption
Some contracts require paying a minimum amount even if the customer uses less. Others only charge what's consumed.
Surplus
It defines what happens to energy the customer doesn't use and who receives what's earned from that surplus.
Early exit
It sets what happens if the customer closes, moves or sells the property before the term ends.
End of contract
It clarifies who keeps the system, at what value and who removes it if it doesn't continue.
The risks of a project with a PPA
Income depends on the customer paying and on the system producing.
The customer
If the business buying the energy closes or stops paying, the project may lose its main income.
Production
Panels generate less as the years go by, and the weather changes output from month to month.
The energy price
If the price is tied to the grid tariff and the tariff falls, income falls too.
Regulation
A change in the connection or surplus rules can affect the project's numbers.
PPAs in Colombia
Small-scale solar generation for own use is mainly governed by CREG Resolution 174 of 2021, which defines self-generation up to 1 MW and how surplus energy is settled.
A farm that delivers energy through the grid, away from the customer, is a different case, because that resolution doesn't cover it. The sale goes through the wholesale energy market via a registered agent, usually a retailer, and plants under 20 MW have their own rules in CREG Resolution 086 of 1996.
Law 1715 of 2014 created tax incentives for renewable energy and Law 2099 of 2021 expanded them. To access them, a project usually needs a UPME certification.
Solar energy guides
- What is a PPA, or power purchase agreementHow a solar power purchase agreement works in Colombia: the four steps, the six parties involved, what goes in writing and when it isn't for you.
- Your electricity bill in Colombia, explainedThe six components of Colombia's electricity tariff, why the total goes up every year and which part of your bill a solar system can replace.
- Solar surplus energy: how it is settled in ColombiaWhat happens to the solar energy you produce and don't use. CREG's three regimes, what the PDE and the AGPE limit are, and which one applies to you.
Related questions
Solar projects
See how it looks in a real project, with its term, its information and its risks.
Project in Structuring
Project in StructuringKeep going
- Investing in solar energy in ColombiaHow a solar project works from start to finish.
- Solar Subway - La PintadaA project under a PPA, with its full information.
- How to evaluate a projectThe key documents and questions before you invest.
Educational content. It is not financial, legal or tax advice, nor a public offering of securities. The figures in the examples are made up. Every investment carries risk and its results may vary.