A recent analysis by Alexander von Welczeck, the CEO of Mill Valley, California-based Solar Power Partners Inc., the third largest solar energy developer in the United States, highlights the importance of power purchase agreements, or PPAs, in driving the solar energy industry to new heights.

As Welczeck points out, the current recession has had an impact on the solar energy industry. In fact, market research firm iSuppli Corp. expects the photovoltaics industry in 2009 to drop to 3.5 gigawatts, down 32 percent from 5.2 gigawatts installed in 2008. This drop in installed capacity is obviously expected to impact solar industry revenues as well, largely due to massive overcapacity, falling prices and weak demand. The loss, says iSuppi, is expected to top more than 40 percent.

The government has attempted to stabilize the industry, first in the form of the American Recovery and Reinvestment Act of 2009, which provided investment tax credits (ITCs) for solar installations, and more recently by adapting the ITC to grant status for those firms whose negative tax liability made claiming ITCs impossible.

State and local incentives, from rebates to tax relief, also help defray the costs of solar installations, but the real problem for consumers (whether business or individual homeowners) has always been the high upfront costs of installing a solar system, which averages out to about $10,000 per kilowatt but drops the more one installs. Thus, a 1-kilowatt system might cost up to $10,000, but a 7-kilowatt system might cost only $63,000.

The cost/benefit ratio, however – remembering that a kilowatt is 1000 watts, and the utility generally charges about eight to ten cents per kilowatt hour – makes the cost of each solar-generated watt between $7 and $10. When times are tough, as they are now, a $7-watt of electricity is literally unthinkable, and incentives cover, at most, 30 percent of upfront costs.

In come PPAs, which offer cash-strapped homeowners and businesses the opportunity to go green and reduce their carbon footprint, install renewable solar, and still benefit with electricity costs that are manageable on almost any budget.

PPAs are offered by independent solar producers, who arrange for financing, install, own and operate solar systems. Unlike companies or individuals, PPAs have the permitting and rebate portions of solar installation down to a science, so the system flows smoothly from the initial contract to the refund/grant/tax break. This is a huge benefit, since estimates place the average cost of solar paperwork at about $1 per watt. For novices, the cost can obviously go much higher.

According to Welczeck, the majority of commercial solar capacity installed in California between last year and this was PPA-driven, and no wonder, since this type of solar incentive – which delivers electricity, under long-term contract, at a fixed rate sometimes as low as that offered by the local utility – has found considerable favor with municipalities and public entities (like hospitals and schools) facing budget constraints not seen since the early 1980s.

Solar is also good for creating jobs, as recently noted by Sharp Solar Vice President T. C. Jones, Jr., who says that the work at the Tennessee Sharp solar factory “couldn’t be done without human hands”.

Given state and local government incentives, and the emergence of PPAs as a positive force in the solar industry, doomsayers who predict the solar industry will bottom out this year might want to wait until all the figures are in to prognosticate.