A Power Purchase Agreement (PPA): What is it?

Meaning

A power producer and a client (an electrical consumer or dealer) typically enter into a long-term electricity supply arrangement known as a power purchase agreement (PPA). The terms of the agreement, including the quantity of power to be provided, agreed rates, accounting, and sanctions for non-compliance, are outlined in the PPA. A PPA can take many different forms and is typically customized for the particular purpose because it is a bilateral agreement. Electricity can be provided on a balance sheet or in physical form. PPAs are commonly utilized by major power customers to assist lower investment costs related to developing or managing renewable energy projects since they may be used to decrease market pricing risks.

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Why PPAs?

PPAs may be a beneficial source of funding or a stabilizing element in long-term power delivery in a variety of circumstances, depending on the market and regulatory framework.

How do PPAs and funding for renewable energy interact?

In many nations, renewable energy plant development (investment costs) and operation (operating costs) are already financed through Power Purchase Agreements. PPAs are especially appealing to nations where utilities must or choose to use renewable energy sources to partially provide their electricity. In regions where legislators are reluctant to advance renewable energy growth (and subsidization), the agreements offer a another avenue for renewable energy expansion.

What happens to PPAs when the time for subsidies ends?

PPAs are a means of guaranteeing follow-up funding for the operation of an existing power plant in the event that a statutory subsidy expires. This may cover running expenses like upkeep and rent.

PPAs are concluded by whom?

PPAs can be signed bilaterally by power producers with a firm that uses their electricity (“Corporate PPA”) or with an electrical trader that buys the electricity generated (“Merchant PPA”). The energy trader has the option of trading the power on an electrical market or continuing to sell power to a particular electricity customer (converting the contract back into a “Corporate PPA”).

PPAs are already used by several multinational firms to buy shares of their power use, or they have expressed plans to do so more often (see here). To get consistent and measurable power pricing, they employ PPAs.

Particularly for operators of facilities with high investment and low operating costs (such PV and wind turbines), PPAs are a useful tool for lowering the risk associated with electricity prices. Plant operators and financing banks can be more assured that the money raised from the sale of energy would, in fact, cover investment expenses because payment for the power has already been partially guaranteed. Long-term, this increases the project’s profitability.

What kinds of Power Purchase Agreements are there?

The variety of potential and current contractual agreements makes it challenging to completely identify the various PPA kinds. Furthermore, it is impossible to precisely describe several PPA features in a single system. Nevertheless, we’ll try to give a summary:

PPAs in physical form

Physical PPAs come in three different varieties, however some of them overlap. All three share a certain amount of power that is delivered and sold under the PPA. The method of supplying power is the sole distinction.

On-site PPA: An on-site PPA requires that the plant and the customer be physically close to one another in order to provide a direct physical supply of power. An on-site PPA indicates that the generating plant is situated behind the consumer’s metering point, or even at the same spot (for example, on-site at a business).The particular installation and the PPA’s settings are often determined by the consumer’s use profile. To the degree that leftover power may be fed into the system, the grid operator is engaged. All on-site PPAs are also corporate PPAs as the power produced by them directly lowers a company’s usage. For instance, an industrial business with a suitable roof on its property could want to lower the cost of purchasing power, but it may not be prepared to install a solar system on its roof. Rather, the business chooses to contract out the project (as well as the associated operational and financial risks). The business enters into a PPA with a project planner on-site for this reason, and the planner installs the solar system on the roof and sells the power produced to the business directly.

Off-site PPAs: An off-site PPA does not physically distribute power to a local customer from the plant. It is just a contract to buy a specific amount of power as specified under the PPA. The producer uses the public grid to distribute the power to the user, as opposed to on-site PPAs. This necessitates an extra settlement between the consumer’s and the power generating plant’s balancing groups. The location of the power producing facility does not have to be near the end user. The plant operator may now select areas with ideal circumstances or an existing facility, adding to the flexibility. Additionally, a single plant may sign many Power Purchase Agreements with various clients, each of whom receives credit for their portion of the power generated through their balancing groups. All parties enjoy long-term price security since the power supply price is agreed in the PPA. Charges and grid fees must still be paid to the grid operator if applicable.

Sleeved PPA: An off-site PPA that involves an energy service provider taking on many tasks and serving as a middleman between producers and consumers is known as a sleeved PPA. It may offer the following services: group management balancing, portfolio aggregation of different electricity producers, residual electricity supply or surplus electricity sales, feed-in forecast preparation, green certificate marketing, and risk assumption (e.g., energy cost balancing or contractual partner default/insolvency risks).

Virtual PPAs, also known as synthetic PPAs

The financial and physical flows of power are separated by synthetic PPAs. This makes contractual agreements much more flexible. Synthetic Power Purchase Agreements (SPPAs) are similar to physical PPAs in that producers and customers agree on a price per kilowatt-hour of power. Nevertheless, the user does not receive the electricity straight from the energy-generating facility. Rather, the generated electricity is taken into its balancing group and traded (for instance, on short-term power markets) by the producer’s energy service provider (such as an electricity trader). Using a platform like the spot market, the consumer’s energy supplier (such a municipal utility) purchases the same feed-in profile that the producer provides to its energy service provider on behalf of the consuming PPA partner.

The so-called contract for difference is now added to this power flow in the synthetic PPA. The PPA contract parties’ goal in this agreement is to make up the difference between the agreed-upon PPA price and the spot market price. Accordingly, each PPA contractual partner has two sources of income: one from the PPA contractual partner and one from the corresponding energy service provider. In every instance, the payments total the PPA price that was initially established and give both parties the intended level of price certainty.

This is a straightforward and administratively inexpensive PPA as there is no direct physical delivery between the contracting parties (as with an on-site PPA) or balancing sheet link between them (as with an off-site PPA). For instance, it works effectively when a producer does not want to create or operate its own balancing group.