A growing number of small and medium-sized enterprises are exploring long-term energy contracts as part of their sustainability strategies. A power purchase agreement offers predictable pricing and access to sustainable renewable energy, but it also comes with obligations that SMEs must understand before committing.
Discover the key considerations that help businesses decide whether a PPA aligns with their operational and financial goals.
Know the Long-Term Commitment Involved
A power purchase agreement typically runs for 10 to 25 years, which means SMEs must be comfortable with a long planning horizon. While fixed or indexed rates can reduce exposure to future energy price fluctuations, they also lock the business into a specific energy supplier for a significant period. This agreement can be advantageous when energy demand is stable, but it becomes a concern if the business is expecting major operational changes, relocations, or expansions. SMEs should assess their long-term energy needs and review whether they have the financial stability required to maintain the contract throughout its duration.
Know the Difference Between On-Site and Off-Site PPAs
SMEs often overlook the distinction between on-site and off-site arrangements. On-site PPAs involve solar installations placed directly on the company’s premises, allowing the business to consume energy produced at the source. This model helps companies reduce grid dependence and visibly supports sustainable renewable energy adoption. On the other hand, off-site PPAs involve sourcing energy from external solar or wind farms, allowing SMEs to access renewable electricity without installing physical infrastructure. Each model has different cost structures, compliance requirements, and operational impacts, so SMEs must choose the option that aligns with their location, available space, and long-term sustainability ambitions.
Evaluate the Financial Implications Carefully
Financial stability is a priority for SMEs, and a PPA must be examined beyond its headline electricity rate. While PPAs often provide cost savings compared with standard market rates, businesses must check for escalation clauses, minimum purchase requirements, early termination penalties, and grid charges that may still apply. Some agreements involve zero upfront capital, while others require shared installation or maintenance costs. SMEs should also consider how the PPA appears in accounting records, as certain contracts may influence asset liabilities or budgeting practices. Conducting a financial model comparison between traditional utility plans and the PPA structure helps clarify long-term cost advantages.
Know Energy Production Variability
Sustainable renewable energy sources are affected by weather conditions, which means production levels can vary. SMEs must be aware that an on-site solar PPA may not always cover 100% of their consumption, especially during cloudy months. Off-site renewable sources can offer more stable output, but they still depend on environmental factors. Businesses should clarify how shortages or excess energy are handled, whether they need to rely on grid supply for additional power, and how pricing works when consumption exceeds the contracted volume. Comprehending these fluctuations ensures SMEs have realistic expectations about their energy mix under a power purchase agreement.
Review Legal, Regulatory, and Technical Considerations
PPAs require attention to local regulations, electrical infrastructure compatibility, and maintenance responsibilities. SMEs should ensure the agreement complies with relevant energy market rules and that installation or connection works do not disrupt day-to-day operations. Legal reviews help clarify ownership rights, performance guarantees, and responsibilities for system failures. Technical assessments confirm whether the premises can support solar panels or whether the selected renewable energy provider is capable of delivering a consistent supply. SMEs, without these checks, risk unexpected delays or operational challenges once the agreement begins.
Conclusion
A power purchase agreement can help SMEs control long-term energy costs while contributing to sustainable renewable energy goals. However, the commitment requires a clear understanding of financial, legal, and operational factors to avoid unexpected challenges later. SMEs can enter a PPA confidently and benefit from a more predictable and environmentally responsible energy strategy by evaluating contract terms carefully and assessing whether their business requirements align with the agreement’s obligations.
Visit Flo to explore a power purchase agreement for your SME.
