Power Purchase Agreement

Priyanka Sanyal
Apr 12, 2023
4 min read

Written by Priyanka Sanyal, Student

Power Purchase Agreement

A long-term electricity supply arrangement between two parties, typically between a power supplier and a client, is known as a power purchase agreement (PPA). (an electricity consumer or trader). The PPA outlines the terms of the contract, including the quantity of electricity to be supplied, the rates to be paid, accounting requirements, and sanctions for non-compliance. A PPA can take many different forms because it is a bilateral agreement, and it is typically tailored to a particular use. Physically or on a balancing sheet, electricity can be delivered. Large power consumers typically utilize PPAs to assist lower investment costs associated with planning or operating renewable energy plants because they can be used to decrease market pricing risks.

Why PPAs?

Different circumstances may emerge in which PPAs are a beneficial source of financing or a stabilizing element in long-term electricity delivery, depending on regulation and the market climate.

How Do PPAs And Renewable Energy Financing Work Together?

Renewable energy plant construction (investment costs) and operation (operating expenses) are already financed in several nations through Power Purchase Agreements. PPAs are especially popular in nations where utilities must or wish to get a portion of their electricity from renewable sources. The agreements offer an alternate way to bring renewable energy to places where politicians are reluctant to promote its spread and subsidization.

What Happens To PPA After Subsidy Period Expires?

PPAs are a technique to ensure that a power station will continue to operate when a statutory subsidy expires. This may cover overhead expenses like rent and maintenance.

Who Includes PPAs?

Power producers enter into PPAs bilaterally with consuming businesses (referred to as "Corporate PPAs") or with energy traders that buy the generated electricity. ("Merchant PPA"). The energy trader has the option of keeping up the supply of electricity to a particular electricity user or choosing to trade the electricity on an electrical market.

Numerous multinational firms have either indicated their intention to more regularly use PPAs to purchase portions of their electricity use. To get predictable and consistent electricity prices, they use PPAs.

PPAs are a useful tool for operators of facilities with significant initial investment but low running expenses to lower the risk associated with the price of energy. (such as PV and wind turbines).

Types of Power Purchase Agreements

Because there are so many different types of contractual agreements that might be used, it is challenging to adequately characterize the many PPA types. Few are:

Physical PPAs

There are three different kinds of physical PPAs, some of which overlap. A fixed amount of electricity that is sold and supplied in the PPA is a feature of all three. The method used to supply electricity is the only distinction.

On-site PPAs – A direct physical supply of electricity is required for an on-site power purchase agreement, which calls for the plant and consumer to be close to one another. With an on-site PPA, the generation plant is situated close to or even at the same place as the consumer's metering point. (on-site at a company, for instance). The specific installation as well as the PPA's specifications, are typically determined by the consumer's consumption profile. As far as leftover electricity can be supplied to the grid, the grid operator is involved. All on-site PPAs are also corporate PPAs because the electricity produced by an on-site PPA directly lowers a company's usage.

Off-site PPAs – Off-site PPAs don't represent a physical supply of power going from the plant to a nearby user. It is essentially a contract to buy a specific amount of electricity as specified in the PPA. The producer sends the electricity to the consumer through the public grid, as opposed to on-site PPAs. Through the balancing groups of the power generating plant and the customer, a further settlement is necessary. It is not necessary for the power plant to be close to the user. This gives the plant operator more choices because they can now select areas with the best circumstances or an existing facility. A single plant may also sign many Power Purchase Agreements with various clients.

Sleeved PPAs – A sleeved PPA is an off-site PPA in which an energy service provider assumes various operations and serves as a middleman between producer and consumer. It might offer the following services: managing group risk, aggregating different electricity producers into its portfolio, selling surplus electricity or providing leftover electricity, creating feed-in forecasts, marketing green certificates, or taking on various risks (like managing energy costs or contract partner default or insolvency risks).

Synthetic Or Virtual PPAs

Synthetic PPAs separate the financial flow from the actual flow of electricity. This gives contractual agreements considerably more flexibility. Similar to a real PPA, producers and customers in synthetic Power Purchase Agreements (also known as SPPAs) agree on a price per kilowatt-hour of electricity. However, electricity is not delivered to the consumer straight from the energy production facility. Instead, the produced electricity is added to the balancing group and traded by the producer's energy service provider.