A power purchase agreement is a contract between two parties, one who generates
electricity for the purpose and one who is looking to purchase electricity. The
PPA defines all of the commercial terms for the sale of electricity between the
two parties, including when the project will begin commercial operation,
schedule for delivery of electricity, penalties for under delivery, payment
terms, and termination. A PPA is the principal agreement that defines the
revenue and credit quality of a generating project and is thus a key
instrument of project finance. There are many forms of PPA in use today and they
vary according to the needs of buyer, seller, and financing counterparties.
In the U.S., PPAs are typically subject to regulation by the Federal Energy
Regulatory Commission. FERC determines which facilities applicable for PPAs
under the Energy Policy Act of 2005. PPAs facilitate the financing of
distributed generation assets such as photovoltaic, microturbines,
reciprocating engines, and fuel cells. Background
A power purchase agreement is a legal contract between an electricity
generator and a power purchaser. Contractual terms may last anywhere
between 5 and 20 years, during which time the power purchaser buys energy,
and sometimes also capacity and/or ancillary services, from the electricity
generator. Such agreements play a key role in the financing of independently
owned electricity generating assets. The seller under the PPA is typically an
independent power producer, or "IPP." In the case of distributed generation,
commercial PPAs have evolved as a variant that enables businesses,
schools, and governments to purchase electricity directly from the generator
rather than from the utility. This approach facilitates the financing of
distributed generation assets such as photovoltaic, micro-turbines,
reciprocating engines, and fuel cells. Parties Involved
= The Seller = Under a PPA, the seller is the entity
that owns the project. In most cases, the seller is organized as a special
purpose entity whose main purpose is to facilitate non-recourse project
financing. = The Buyer =
Under a PPA, the buyer is typically a utility that purchases the electricity
to meet its customers' needs. In the case of distributed generation involving
a commercial PPA variant, the buyer may be the occupant of the building—a
business, school, or government for example. Electricity traders may also
enter into PPA with the Seller. Regulation
PPAs are typically subject to regulation at the state and federal level to
varying degrees depending on the nature of the PPA and the extent to which the
sale of electricity is regulated where the project is sited. In the U.S., the
Federal Energy Regulatory Commission determines which facilities are
considered to be exempt wholesale generators or qualifying facilities and
are applicable for PPAs under the Energy Policy Act of 2005.
Where Appropriate Power purchase agreements may be
appropriate where: the projected revenues of the project is
uncertain and so some guarantees as to quantities purchased and price paid are
required to make the project viable; protection from cheaper or subsidized
domestic or international competition; there is one or a few major customers
that will be taking the bulk of the product - for example, a government may
be purchasing the power generated by a power plant - the government will want
to understand how much it will be paying for its power and that it has the first
call on that power, the project company will want certainty of revenue;
purchaser wishes to secure security of supply.
with solar power projects in non-profit companies in order to reduce costs for
installation of the solar energy system Financing
The PPA is often regarded as the central document in the development of
independent electricity generating assets. Because it defines the revenue
terms for the project and credit quality, it is key to obtaining
non-recourse project financing. One of the key benefits of the PPA is
that by clearly defining the output of the generating assets and the credit of
its associated revenue streams, a PPA can be used by the PPA provider to raise
non-recourse financing from a bank or other financing counterparty.
Contract Timeline = Effective Date =
The PPA is considered contractually binding on the date that it is signed,
also known as the effective date. Once the project has been built, the
effective date ensures that the purchaser will buy the electricity that
will be generated and that the supplier will not sell its output to anyone else
except the purchaser. = Commercial Operation =
Before the seller can sell electricity to the buyer, the project must be fully
tested and commissioned to ensure reliability and comply with established
commercial practices. The commercial operation date is defined as the date
after which all testing and commissioning has been completed and is
the initiation date to which the seller can start producing electricity for
sale. The commercial operation date also specifies the period of operation,
including an end date that is contractually agreed upon.
= Preemptive Termination Date = Typically, termination of a PPA ends on
the agreed upon commercial operation period. A PPA may be terminated if
abnormal events occur or circumstances result that fail to meet contractual
guidelines. The seller has the right to curtail the delivery of energy if such
abnormal circumstances arise, including natural disasters and uncontrolled
events. The PPA may also allow the buyer to curtail energy in circumstances where
the after-tax value of electricity changes. When energy is curtailed, it is
usually because one of the parties involved was at fault, which results in
paid damages to the other party. This may be excused in extraordinary
circumstances such as natural disasters and the party responsible for repairing
the project is liable for such damages. In situations where liability is not
defined properly in the contract, the parties may negotiate force majeure to
resolve these issues. Operation and Metering
Maintenance and operation of a generation project is the responsibility
of the seller. This includes regular inspection and repair, if necessary, to
ensure prudent practices. Liquidated damages will be applied if the seller
fails to meet these circumstances. Typically, the seller is also
responsible for installing and maintaining a meter to determine the
quantity of output that will be sold. Under this circumstance, the seller must
also provide real-time data at the request of the buyer, including
atmospheric data relevant to the type of technology installed.
Sales = Delivery Point =
The PPA will distinguish where the sale of electricity takes place in relation
to the location of the buyer and seller. If the electricity is delivered in a
"busbar" sale, the delivery point is located on the high side of the
transformer adjacent to the project. In this type of transaction, the buyer is
responsible for transmission of the energy from the seller. Otherwise, the
PPA will distinguish another delivery point that was contractually agreed on
by both parties. = Pricing =
Electricity rates are agreed upon as the basis for a PPA. Prices may be flat,
escalate over time, or be negotiated in any other way as long as both parties
agree to the negotiation. In a regulated environment, Electricity Regulator will
regulate the price. A PPA will often specify how much energy the supplier is
expected to produce each year and any excess energy produced will have a
negative impact on the sales rate of electricity that the buyer will be
purchasing. This system is intended to provide an incentive for the seller to
properly estimate the amount of energy that will be produced in a given period
of time. = Billing and Payments =
The PPA will also describe how invoices are prepared and the time period of
response to those invoices. This also includes how to handle late payments and
how to deal with invoices that became final after periods of inactivity
regarding challenging the invoice. The buyer also has the authority to audit
those records produced by the supplier in any circumstance. there is a defined
timeline when PPA Provider has to send invoice to the Generator or vice-versa
and if that timeline is not met then it has its own consequences, which varies
from one PPA Provider to another. = Performance Terms =
The buyer will typically require the seller to guarantee that the project
will meet certain performance standards. Performance guarantees let the buyer
plan accordingly when developing new facilities or when trying to meet demand
schedules, which also encourages the seller to maintain adequate records. In
circumstances where the output from the supplier fails to meet the contractual
energy demand by the buyer, the seller is responsible for retributing such
costs. Other guarantees may be contractually agreed upon, including
availability guarantees and power-curve guarantees. These two types of
guarantees are more applicable in regions where the energy harnessed by
the renewable technology is more volatile.
Example Contracts A basic sample PPA between the
Bonneville Power Administration and a wind power generating entity was
developed as a reference for future PPAs. Solar PPAs are now being
successfully utilized in the California Solar Initiative's Multifamily
Affordable Solar Housing program. This aspect of the successful CSI program was
just recently opened for applications. Delmarva Power and Light company has
recently entered into a WPPA with Bluewater Wind Delaware LLC.
A provider of PPA contracts in Scandinavia, Germany, and the United
Kingdom is Neas Energy. Other PPA providers in the United Kingdom and
Europe include Solar Europa, Axpo and Smartest Energy. A provider of brokerage
services in the PPA market is STX Services BV.
See also project finance
renewable energy policy Renewable energy commercialization
Renewable portfolio standard wind farm
wind power Wind power in the United States
References ^ Albert Thumann, Eric A. Woodroof
Energy Project Financing: Resources and Strategies for Success - 2009- Page 93
"WHAT IS A POWER PURCHASE AGREEMENT? A power purchase agreement is a long-term
agreement to buy power from a company that produces electricity. A third-party
financier will provide the capital to build, operate, and ..."
^ D. R. Carmichael, Paul H. Rosenfield Accountants' Handbook, Special
Industries and Special Topics 2003 Page 38 "The fact that an agreement is
labeled a “power purchase agreement” is not conclusive. If a contract “conveys
the right to use property, plant and equipment,” the contract should be
accounted for as a lease. Other power purchase contracts.."
^ a b "FERC." FERC.gov. Web. 30 Nov. 2010.
^ PPPIRC. "PPP in Infrastructure Resource Center".
simple-steps#solarpowerpurchaseagreement ^ "Free Online Dictionary: Non-Recourse
Finance." TheFreeDictionary.com. Web. 30 Nov. 2010.
^ "Financial Glossary." People.hbs.edu. Web. 30 Nov. 2010.
^ "Free Online Dictionary: Counterparty." TheFreeDictionary.com.
Web. 30 Nov. 2010. ^ a b c d e f g h i "AGMRC." AGMRC.org.
Web. 30 Nov. 2010. ^ "USDOE & BPA PPA." BPA.gov. Web. 30
Nov. 2010. ^ "MASH." CPUC.CA.gov. Web. 30 Nov.
2010. ^ "Delmarva WPPA." CEOE.UDEL.edu. Web.
30 Nov. 2010. ^ "Solar Europa." solareuropa.co.uk.
Web. 10 Apr. 2015. External links
Sample Power Purchase Agreement