Power Purchase Agreements As A Strategic Financial Lever for Real Estate Owner-Operators
Power Purchase Agreements As A Strategic Financial Lever for Real Estate Owner-Operators
As real estate owner-operators, asset management companies, and large warehouse managers - a group commonly referred to as Real Estate Investment Trusts (REITs) - make strides to navigate inflation and volatility in today’s energy economy, it can sometimes feel like there is no way to achieve sustainability, enhance profitability, and cut costs all at once. Power Purchase Agreements (PPAs) can serve as a strategic financial mechanism to achieve each of these goals in tandem, offering a pathway to leverage tax credit incentives and enhance profitability, despite not directly receiving the electricity generated by these agreements.
Various Types of REITs
Any type of REIT that manages property or building rooftop space with the capacity to host a solar energy system can leverage a PPA as a strategic financial mechanism. There are 14 basic types of REITs:
| Office | Gaming |
| Industrial | Retail |
| Lodging/Resort | Residential |
| Timberlands | Healthcare |
| Self-storage | Communications |
| Datacenter | Diversified |
| Speciality | Mortgage |
What are power purchase agreements and how are they relevant to real estate owner-operators?
A power purchase agreement is a contractual agreement between an energy provider and a customer, which typically lasts from 15 to 25 years. The energy provider develops, owns, and operates the system, while the customer purchases the electricity produced by the system at a stable rate.
In the realm of REITs, the key to a PPA's appeal lies not in the direct consumption of energy, which goes to the customer, but in the financial and environmental credentials it provides. PPAs allow certain REITs to indirectly invest in renewable energy projects by purchasing energy at pre-agreed prices, thereby securing long-term energy costs and supporting sustainability without the need to own or operate energy assets.
Financial Incentives and Tax Benefits
A significant draw for REITs using PPAs is the ability to tap into generous tax credits, such as the Investment Tax Credit (ITC), which is pivotal under recent legislative frameworks like the Inflation Reduction Act (IRA). While REITs themselves do not qualify for direct tax credits since they do not physically host the renewable energy systems, they can benefit financially through agreements with tax equity investors. These investors can utilize the tax credits and pass on the savings to REITs in the form of lower energy rates or through structured financial returns integrated within the PPA.
Other Strategic Advantages for Real Estate Owner-Operators
PPAs provide a hedge against volatile energy prices, securing stable and often below-market rates. For REITs, whose operating expenses are significantly influenced by energy costs, this predictability can enhance overall financial performance and attractiveness to investors looking for stable returns.
Enhancing Asset Value
Investing in PPAs also enhances the sustainability profile of an REIT’s portfolio, a factor increasingly valued in the market. Properties associated with green energy initiatives often see improved marketability and higher valuations due to their alignment with global sustainability goals.
Regulatory Compliance and Market Leadership
As regulations tighten around environmental impact, REITs engaged in PPAs demonstrate proactive compliance with emerging standards, positioning themselves as leaders in sustainable real estate investment. This not only mitigates financial risk but also enhances reputation, attracting tenants and investors who prioritize environmental responsibility.
Moving Forward with PPAs
For REITs, the decision to engage in PPAs should be aligned with a broader strategic vision that recognizes the interplay between financial benefits and sustainability commitments. The integration of PPAs into the investment strategy can serve as a catalyst for transformation within the real estate sector, driving forward a new era of eco-conscious, financially savvy real estate management.
Our Integrated Approach
Promise Energy recognizes the unique financial positions and sustainability goals of each investment trust. Our approach to integrating PPAs into your investment strategy is tailored to maximize both your fiscal returns and your property’s green credentials. Our experts customize solutions tailored to unique energy needs, encompassing solar, storage, CHP, and fleet electrification. Partnering with Promise Energy ensures businesses navigate compliance with confidence while unlocking long-term environmental and economic benefits.
Partner with Promise
Navigating the renewable energy transition demands a strategic approach. With the support of Promise Energy, businesses can streamline compliance efforts, embrace sustainability, and position themselves for success in a rapidly evolving regulatory landscape. Partner with Promise Energy to unlock the benefits of sustainability-driven practices and pave the way towards a greener future.
Contact Promise Energy at info@promiseenergy.com for a complimentary energy evaluation of your facility.
At Promise Energy, we don’t believe that one size fits all. We pride ourselves in designing and installing customized energy solutions that provide the greatest long-term value and energy control for our customers.