Solar PPA Rates: What Sets the Price per kWh

A PPA tariff is the price per kilowatt hour that a buyer pays the owner of a solar system under a power purchase agreement, written into the contract as one flat figure or as a starting figure that rises by a set percentage each year. Solar PPA rates look like market prices, but each one is a calculation: the developer needs the tariff to repay the system, its upkeep and the money invested in it, spread over the kilowatt hours the system will really produce.

Cost of capital and yield move that number more than most buyers expect, and the escalator, the term and any minimum purchase clause change what you pay over twenty years.

Below we build a tariff from its inputs and set it against the grid or diesel power you buy today. For how a PPA works, read our solar PPA guide. Commercial solar financing in Africa sets PPAs beside loans and leases.

What a Solar PPA Tariff Is Made Of

A developer prices a PPA by finding the flat price per kilowatt hour at which the project repays the money put in, at the required return, over the contract term. That price is the levelised cost. The tariff has to sit at or above it, with tax, development costs, overheads and a margin for risk on top.

The calculation is the present value of all costs divided by the present value of all energy. Costs are the capital spent on day one plus operation and maintenance each year. Energy is each year's output, falling slightly as modules degrade. Both are discounted at the developer's cost of capital. Nearly all the cost arrives on day one and the energy arrives over twenty years, so a higher discount rate pushes the price per kilowatt hour up hard.

Six inputs set the floor.

Capital cost. Modules, inverters, mounting, cabling, protection, grid connection, engineering and construction, per kilowatt peak (kWp) installed. In our judgement small roofs usually cost more per kWp than large ones, because design, mobilisation and the grid connection are shared across fewer panels.

Yield. Kilowatt hours produced per kWp per year, set by irradiation, tilt, shading, temperature, soiling and availability. Cost is divided by this number, so a model yield 10 percent above what the plant really delivers makes the tariff look about 9 percent cheaper than it should (1 / 1.10 = 0.909).

Contract term. The capital is recovered over the term, so a shorter term leaves fewer kilowatt hours to spread it across.

Cost of capital. The return the developer's lenders and investors require. In the example below it is the largest single lever, and it is the input the buyer sees least.

Operation and maintenance. Cleaning, inspection, monitoring, insurance and a reserve for replacing inverters. Our O&M contract guide covers what the scope should hold.

Degradation. Output falls year by year, so later years add less energy. The rate depends on module quality and climate, as set out in our guide to panel lifespan and degradation.

A Worked Levelised Tariff

Take a hypothetical 1,000 kWp roof. Capital cost is $800 per kWp. O&M is $15 per kWp per year, held flat. Year one yield is 1,700 kWh per kWp, degrading 0.5 percent a year. The term is 20 years, and the plant is assumed to have no value to the developer after that. Ignore tax. These are inputs picked for the arithmetic, not a quotation or a market average.

Per kWp, the present value of costs is the capital plus O&M discounted over the term. At a cost of capital of 8 percent, the 20 year annuity factor is 9.8181, so costs are 800 + (15 x 9.8181) = $947.27.

The present value of energy is 1,700 kWh multiplied by a discounted energy factor: the sum over the 20 years of 0.995 raised to the power (year minus 1), divided by 1.08 raised to the power of the year. That factor is 9.4814, so the present value of energy is 16,118 kWh. The tariff floor is 947.27 / 16,118 = $0.0588 per kWh.

Now change only the cost of capital, to 14 percent, as might apply in a higher-risk market. The annuity factor falls to 6.6231, so costs are 800 + (15 x 6.6231) = $899.35. The energy factor falls to 6.4426, so the present value of energy is 10,952 kWh. The floor becomes 899.35 / 10,952 = $0.0821 per kWh. Same roof, same equipment, same sun, and a tariff 39.7 percent higher.

What moves the tariff floor on a hypothetical 1,000 kWp roof over 20 years, one input at a time from a base case of $0.0588 per kWh at 8 percent cost of capital. Source: MIMAH engineering practice; cost of capital context from IRENA, Renewable power generation costs in 2025 (2026).

Changing one input at a time from the 8 percent case gives the order of importance. Cutting capital cost by 10 percent trims the floor by 8.4 percent. A 10 percent shortfall in yield raises it by 11.1 percent. Doubling O&M to $30 per kWp adds 15.5 percent, and degradation of 1.0 instead of 0.5 percent adds 3.5 percent. Term matters more than most buyers expect: 15 years adds 11.6 percent and 10 years adds 37.0 percent, because the same capital is repaid from fewer kilowatt hours.

A buyer can test the yield and degradation figures, since they are engineering. The cost of capital belongs to the developer, and the buyer moves it mainly by being a better credit.

How Cost of Capital, Currency and Offtaker Credit Move the Price

IRENA's 2026 cost report makes the point with a global figure. Solar PV installed costs fell around 6 percent in 2025, yet the generation cost of the technology did not move, because a higher cost of capital offset the cheaper equipment. IRENA's model attributes about 56 percent of the variation in financing costs to country conditions, against 24 percent for the technology.

A summary of the same IRENA data by Sustainable Stories Africa fills in the size of the gap. For a standard, fully contracted project the real cost of capital runs from about 3 percent in deep mature markets to above 10 percent in the highest-risk economies, and merchant projects, with no long-term contract, pay roughly double.

So the long-term contract is what unlocks the cheaper money, and the developer's lender is lending against your promise to pay. We would expect a parent guarantee or a deposit to do more for the tariff than haggling over the third decimal place.

Currency works through the same arithmetic. A tariff fixed in dollars and paid from local currency revenue has an escalator built in, whether the contract says so or not. Suppose the dollar rises 8 percent a year against the local currency. A flat $0.08 tariff then costs 1.08 to the power of 9, or 1.999 times as much in local terms by year 10, and 1.08 to the power of 19, or 4.316 times as much by year 20. If your revenue does not rise that fast, the tariff takes a growing share of it. A local currency tariff moves that risk to the developer, who prices it in.

Flat Tariff or Escalator: Twenty Years of Arithmetic

A 2009 checklist for US state and local governments, from the US National Renewable Energy Laboratory (NREL, now the National Laboratory of the Rockies), describes the two common structures: a fixed price for the whole contract, or a fixed escalator, usually 2 to 5 percent. Some owners escalate for a period such as ten years and then hold flat. Two offers can carry the same value to the developer and still differ for the buyer.

Take the 1,000 kWp roof again with the developer's cost of capital at 8 percent, and assume the buyer takes all the output: 1,700,000 kWh in year one, falling 0.5 percent a year, 32,432,437 kWh over the term. Offer A is a flat $0.0800 per kWh. Offer B escalates at 2 percent a year, and its starting tariff is set so the developer gets the same present value: 0.0800 x 9.4814 / 10.9309 = $0.0694, where 10.9309 is the same discounted sum with the 2 percent growth added. The money totals below use that starting tariff unrounded, $0.06939.

Offer B starts 13 percent below Offer A. It overtakes it in year 9, at $0.0813 against $0.0800, and reaches $0.1011 in year 20, which is 26 percent above the flat tariff. Over the 20 years the buyer pays $2,594,595 under Offer A and $2,725,101 under Offer B, 5.0 percent more in cash. At the developer's 8 percent the two payment streams are worth the same, $1,289,468.

The buyer's own discount rate breaks the tie. At 12 percent, the present value of payments is $985,969 under A and $966,001 under B, so the escalating offer is $19,968 cheaper. At 6 percent the order reverses, $1,502,148 under A and $1,519,346 under B. The dividing line is the developer's 8 percent: a buyer whose money costs more than that, perhaps because cash is tight today, prefers B, and a buyer with cheaper money prefers A.

Your view on future grid prices does not change that ranking, because the avoided cost is the same under both offers. It changes how thin your margin gets in the late years of Offer B.

A flat tariff and a 2 percent escalator that carry the same value to the developer at 8 percent, compared over 20 years on a hypothetical 1,000 kWp roof. Source: MIMAH engineering practice.

Ask for the tariff as a year by year schedule attached to the contract, not as "2 percent". Check whether the escalator applies to the whole tariff, whether it stops after a set year, and whether it is fixed or linked to an index. Our guide to solar PPAs covers the related trap, an escalating tariff that crosses your grid price.

What Published Benchmarks Say, and What They Do Not

IRENA gives a global weighted average generation cost of USD 44 per MWh ($0.044 per kWh) for solar PV in 2025, unchanged from 2024. The Sustainable Stories Africa summary puts African utility scale solar at USD 52 per MWh. Those are large plants, measured as a cost of generation. They carry no retail margin and no small roof penalty.

For rooftop PPAs there is an Indian example. In a Solar Energy Corporation of India auction reported in December 2025, for institutional rooftops under the renewable energy service company model, winning tariffs ran from Rs 3.34 to Rs 4.65 per kWh. The lowest went to four sites of 350 to 1,000 kW, and the highest to the smallest site, 85 kW. Size is not the whole story, though, because the largest site, 1,500 kW, cleared at Rs 3.69.

None of this replaces a bid for your roof. Use these figures to check whether an offer looks sensible once size, currency and credit are allowed for.

Comparing the Tariff With Grid and Diesel Cost

The saving from a PPA is the kilowatt hours actually displaced multiplied by (avoided cost minus tariff).

For grid power, use the energy charge you really avoid, not the bill divided by units, which includes fixed charges the solar system will not remove. Look at the direction too. NERSA approved an average increase of 8.76 percent from 1 April 2026 for customers Eskom supplies directly, with municipal customers averaging 9.01 percent from 1 July 2026. If rises of that size continued, a 2 or 3 percent escalator would stay well behind the grid, though one year's decision is no forecast. Where regulated tariffs are held down and then reset in steps, the same escalator can close the gap.

For diesel, the fuel cost per kWh is the price per litre divided by the kWh the set delivers per litre. Suppose diesel costs $1.20 a litre and the set delivers 3.5 kWh per litre. Fuel alone is 1.20 / 3.5 = $0.343 per kWh. Against a flat tariff of $0.08, each diesel kWh displaced saves $0.263 before generator maintenance. Low load worsens the kWh per litre, and the generator still runs at night. Our comparison of solar and diesel generators in Nigeria works through the other costs.

Take or Pay and Deemed Generation Are Price Terms Too

A take or pay clause obliges the buyer to pay for a minimum quantity whether or not it is used. The 2009 NREL checklist tells public buyers to be wary of provisions requiring payment regardless of use, and the reason is simple arithmetic. Suppose the tariff is $0.08 and the minimum is 1,500,000 kWh a year, but a shutdown cuts your use to 1,300,000 kWh. You pay 1,500,000 x 0.08 = $120,000 for 1,300,000 kWh, an effective $0.0923 per kWh, which is 15.4 percent above the tariff.

Deemed generation is the energy the system would have produced but could not deliver because of something on the buyer's side, billed as though it had been delivered. A plant shutdown, a refused access day or a fault on your network can trigger it, and so can a weekend when the load falls below the array's output, if the contract is written that way. On an unreliable grid, settle who carries a grid outage, because a grid-tied inverter stops when the grid goes.

Ask how deemed energy is calculated, from which irradiance sensor and by what model, because that method sets how much you pay for a day nothing was delivered. The same calculation turns up outside PPAs. In the example performance guarantee in the NREL O&M best practices guide, the operator adds back energy lost to force majeure or to the actions of the owner, utility or host before its performance is measured. There the add-back protects the operator. In a PPA it becomes a bill.

The price you really pay is total annual payments divided by the kWh you actually use.

Three checks on a PPA tariff against the cost it avoids and the clauses that change the price actually paid. Source: Eskom, Eskom implements NERSA decision for Financial Year 2027 (March 2026); MIMAH engineering practice.

Questions to Put to a PPA Offer Before Signing

Ask for the engineering assumptions. Capital cost is private, but yield, degradation, sizing and the O&M scope are inputs you can test.

Convert every offer to one price. Add take or pay, deemed energy and any fixed monthly fee, then divide by the kWh you will really consume.

Test two futures for grid or diesel. Run one where the price rises fast and one where it stays flat in money terms.

Check the currency. If the tariff is not in the currency you earn, model a sharp devaluation as well as the base case.

If the offer beats your avoided cost even with that price flat, it is a sound deal on price. If it wins only when grid or diesel prices climb quickly, you are buying a bet on those prices and should value it as one.

MIMAH's renewable energy team checks the yield, degradation and sizing assumptions beneath a PPA offer. If you run on diesel, our solar payback calculator estimates payback on an owned system, a useful number to hold beside the tariff. If you want the arithmetic checked, get in touch.