A power purchase agreement (PPA), or electricity power agreement, is a contract between two parties, one which generates electricity (the seller) and one which is looking to purchase electricity (the buyer). 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 counter parties.
Contractual terms of a PPA 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 (i.e. not owned by a
utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
) electricity generating assets. The seller under the PPA is typically an independent power producer, or "IPP."
In the case of
distributed generation
Distributed generation, also distributed energy, on-site generation (OSG), or district/decentralized energy, is electrical generation and storage performed by a variety of small, grid-connected or distribution system-connected devices referred to ...
(where the generator is located on a building site and energy is sold to the building occupant), 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. More than 137 firms in 32 countries reported the signing of power purchase agreements in 2021.
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
A special-purpose entity (SPE; or, in Europe and India, special-purpose vehicle/SPV; or, in some cases in each EU jurisdiction, FVC, financial vehicle corporation) is a legal entity (usually a limited company of some type or, sometimes, a limited ...
whose main purpose is to facilitate
non-recourse project financing Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of eq ...
.
The buyer
Under a PPA, the buyer is typically a utility or a company 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
United Kingdom
In the UK, PPAs are regulated by the
Department for Business, Energy & Industrial Strategy
The Department for Business, Energy and Industrial Strategy (BEIS) is a department of His Majesty's Government. The department was formed during a machinery of government change on 14 July 2016, following Theresa May's appointment as Prime ...
(BEIS).
United States
In the United States, PPAs are typically subject to regulation by the
Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission (FERC) is the United States federal agency that regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce and regulates the transportation of oil by pipeline in ...
(FERC). FERC determines which facilities are applicable for PPAs under the
Energy Policy Act of 2005
The Energy Policy Act of 2005 () is a federal law signed by President George W. Bush on August 8, 2005, at Sandia National Laboratories in Albuquerque, New Mexico. The act, described by proponents as an attempt to combat growing energy problems ...
.
[FERC]
." FERC.gov. Web. 30 Nov. 2010. PPAs facilitate the financing of distributed generation assets such as photovoltaic, microturbines, reciprocating engines, and fuel cells.
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., FERC determines which facilities are considered to be exempt wholesale generators (EWG) or qualifying facilities and are applicable for PPAs under the
Energy Policy Act of 2005
The Energy Policy Act of 2005 () is a federal law signed by President George W. Bush on August 8, 2005, at Sandia National Laboratories in Albuquerque, New Mexico. The act, described by proponents as an attempt to combat growing energy problems ...
.
PPAs are more prevalent in the United States. However, in recent years, this type of financing has gained pace in the European Union, where it has been utilized to fund about 9 GW of output, headed by significant contracts in Spain and Scandinavia.
Germany
The German Energy Agency (
Deutsche Energie-Agentur) has argued that PPAs are central to the German
energiewende
The ''Energiewende'' (; ) is the ongoing transition by Germany to a low carbon, environmentally sound, reliable, and affordable energy supply. The new system intends to rely heavily on renewable energy (particularly wind, photovoltaics, and ...
and require better regulatory support.
[
]
Use
Power purchase agreements (PPAs) may be appropriate where:
* the projected revenue 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 (e.g., where a neighboring power plant is producing cheaper power) is desired;
* 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 (power plants). 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 (such as a solar electric system) 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
An effective date or as of date is the date upon which something is considered to take effect, which may be a past, present or future date. This may be different from the date upon which the event occurs or is recorded.
See also
*Coming into fo ...
. 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.
[AGMRC]
." AGMRC.org. Web. 30 Nov. 2010.
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 (i.e. when the project has been substantially completed). 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
In contract law, (from Law French: 'overwhelming force', ) is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such ...
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, an 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 an 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
The Bonneville Power Administration (BPA) is an American federal agency operating in the Pacific Northwest. BPA was created by an act of Congress in 1937 to market electric power from the Bonneville Dam located on the Columbia River and to constr ...
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 (MASH) program.
This aspect of the successful CSI program was just recently opened for applications.
PPAs can be managed in the European market by service providers. The legal agreements between the statewide power sectors(seller) and the trader(buyer/who buys large quantity of power) will be treated as the PPA in power sector.
Data center
A data center (American English) or data centre (British English)See spelling differences. is a building, a dedicated space within a building, or a group of buildings used to house computer systems and associated components, such as telecommunic ...
owners
Amazon
Amazon most often refers to:
* Amazons, a tribe of female warriors in Greek mythology
* Amazon rainforest, a rainforest covering most of the Amazon basin
* Amazon River, in South America
* Amazon (company), an American multinational technology c ...
,
Google
Google LLC () is an American multinational technology company focusing on search engine technology, online advertising, cloud computing, computer software, quantum computing, e-commerce, artificial intelligence, and consumer electronics. ...
, and
Microsoft
Microsoft Corporation is an American multinational technology corporation producing computer software, consumer electronics, personal computers, and related services headquartered at the Microsoft Redmond campus located in Redmond, Washing ...
have used PPAs to offset the
emissions
Emission may refer to:
Chemical products
* Emission of air pollutants, notably:
**Flue gas, gas exiting to the atmosphere via a flue
** Exhaust gas, flue gas generated by fuel combustion
** Emission of greenhouse gases, which absorb and emit rad ...
and power usage of
cloud computing
Cloud computing is the on-demand availability of computer system resources, especially data storage ( cloud storage) and computing power, without direct active management by the user. Large clouds often have functions distributed over mul ...
. Amazon has signed power purchase agreements with 44 renewable energy projects in nine different countries, totaling 6.2 GW in 2021, following its commitment to power its facilities with 100% renewable energy by 2030 and zero carbon emissions by 2040.
Some
manufacturers
Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to a range ...
with heavy carbon emission footprints and energy usage such as
Anheuser-Busch InBev
Anheuser-Busch InBev SA/NV, commonly known as AB InBev, is an American-Belgian multinational drink and brewing company based in Leuven, Belgium. AB InBev has a global functional management office in New York City, and regional headquarters ...
have also shown interest in PPAs. In 2017, Anheuser-Busch InBev agreed to purchase using a PPA from the utility company
Iberdrola
Iberdrola () is a Spanish multinational electric utility company based in Bilbao, Spain. Iberdrola has a workforce of around 34,000 employees serving around 31.67 million customers. Subsidiaries include Scottish Power (United Kingdom) ...
in
Mexico
Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
for 220 MW of new
wind farm energy.
Recently, a new form of PPA was proposed to commercialize
electric vehicle
An electric vehicle (EV) is a vehicle that uses one or more electric motors for propulsion. It can be powered by a collector system, with electricity from extravehicular sources, or it can be powered autonomously by a battery (sometimes cha ...
charging stations
A charging station, also known as a charge point or electric vehicle supply equipment (EVSE), is a piece of equipment that supplies electrical power for charging plug-in electric vehicles (including electric cars, electric trucks, electric b ...
through a bi-lateral form of power purchase agreement.
The
European Federation of Energy Traders
The European Federation of Energy Traders (EFET) is an association of European energy traders in markets for wholesale electricity and gas. EFET was founded in 1999 in response to the liberalisation of electricity and gas markets within the Europe ...
(EFET) has released a set of CPPA Standard Documentation. Further research in this area is anticipated to benefit the PPA industry.
[{{Cite web , last=Evans , first=Henry Edwardes , date=2019-06-19 , title=EFET launches standard corporate power purchase agreement , url=https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/electric-power/061919-efet-launches-standard-corporate-power-purchase-agreement , access-date=2022-09-01 , website=www.spglobal.com , language=en]
See also
*
Project finance Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equi ...
*
Renewable energy policy
Renewable energy commercialization involves the deployment of three generations of renewable energy technologies dating back more than 100 years. First-generation technologies, which are already mature and economically competitive, include b ...
*
Renewable energy commercialization
Renewable energy commercialization involves the deployment of three generations of renewable energy technologies dating back more than 100 years. First-generation technologies, which are already mature and economically competitive, include b ...
*
Renewable portfolio standard
*
Wind farm
A wind farm or wind park, also called a wind power station or wind power plant, is a group of wind turbines in the same location used Wind power, to produce electricity. Wind farms vary in size from a small number of turbines to several hundre ...
*
Wind power
Wind power or wind energy is mostly the use of wind turbines to electricity generation, generate electricity. Wind power is a popular, sustainable energy, sustainable, renewable energy source that has a much smaller Environmental impact of wi ...
*
Wind power in the United States
Wind power is a branch of the energy industry that has expanded quickly in the United States over the last several years. From January through December 2021, 379.8 terawatt-hours were generated by wind power, or 9.23% of electricity in the U ...
*
Photovoltaic power station
A photovoltaic power station, also known as a solar park, solar farm, or solar power plant, is a large-scale grid-connected photovoltaic power system (PV system) designed for the supply of merchant power. They are different from most building- ...
*
Agrivoltaic
Agrivoltaics, agrophotovoltaics, agrisolar, or dual-use solar is the simultaneous use of areas of land for both solar photovoltaic power generation and agriculture. The coexistence of solar panels and crops implies a sharing of light between the ...
References
External links
Sample Power Purchase Agreement
Electricity economics
Pricing
Renewable energy policy