Renewable Energy Guide/Power Purchase Agreements
Power Purchase Agreements
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
This guide describes the principal PPAs in the market today for renewable energy assets:
Utility PPA or Export PPA
With a feed-in-tariff (FiT) comes from a local transmission distribution company or a utility and is often backed by a government or state. This form of revenue stream was particularly popular in Germany is most likely the reason why the renewable energy market has grown so fast. The revenue is usually based on the energy production of the project. The off-taker usually has an investment-grade rating, which makes it such an attractive revenue source for investors. However in recent years, FiT tariffs have fallen significantly and not every country is as good in administering them as Germany. This is the reason why other types of PPA are becoming more mainstream.
A utility PPA, also referred to as an export PPA is a bi-lateral agreement with a local transmission distribution company or a utility. Modern utility PPAs include clauses of curtailment, which is important for planning out the expected revenue streams of a project.
This form of PPA is becoming increasingly popular, especially in Europe. There are many forms of corporate PPAs, depending where the project is located.
The behind-the-meter PPA, sometimes also referred to as host PPA, is is a bilateral agreement between the system owner and the off-taker for a project located on the off-taker’s property. Generally, the off-taker also grants site control for the project, which becomes part of the PPA. The challenge is that because the system sits on the off-taker’s land or roof, in the event of termination or at the expiration of the PPA, alternative off-take opportunities may be limited.
This PPA is executed pursuant to a net-metering tariff authorized by the state public utilities commission or public services commission and implemented by the utility. It is important here to ensure that the PPA and the project are structured in accordance with the applicable net metering tariff and all eligibility requirements are met including timely submission of application. Net metering tariffs vary by state and, in some cases, by the utility territory.
Contract for differences (CFD) or virtual PPA
This is used for projects sited remotely from the off-taker, but within the same utility or regional transmission organization (e.g., PJM) territory. The CFD provides a fixed-for-floating rate and the agreement may indicate that it is for the physical delivery of power at the node.
Sleeved PPA or Off-site PPA
With a sleeved PPA the project is producing energy at a different location from the off-taker. An energy retailer of the project owner will need to use the services of a utility. Sometimes sleeved PPAs can be used to power multiple consumption loads with a single project, provided these are all located in the same market or sub market.
With a merchant PPA, project owners are selling energy wholesale into an energy market or energy exchange. The energy can be sold spot on an hourly basis, day-ahead or other short contract durations. Merchant PPA prices may be considerably higher than fixed bi-lateral PPAs, which makes it an attractive source or revenue. However banks and investors often want to offset the risk of variable pricing with a combination of hedges and swaps.
This off-take arrangement (often a form of net metering) is enjoying popularity at the moment. “Community solar” is used to designate a wide variety of project configurations in the development community. If often means a structure whereby the system owner sells electricity to the utility, provided that the system owner is able to amass a certain amount of subscribers within the utility’s territory.
Under the PPA terms, energy invoicing for the newer types of PPAs can be increasingly complex. That is why independent power producers are using renewable asset management software to help them automate the task.
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