Renewable Energy Guide/PPA Terms
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.
This guide describes the key contract terms that you will find in a PPA:
Under a PPA, the seller is the entity that owns the project. In most cases, the seller is organized as a special purpose vehicle (SPV), or special purpose entity (SPE) or project company, whose main purpose is to own the generating facility. SPVs can be owned by independent power producers (IPPs), utilities, corporates, investor or funds.
Under a PPA, the buyer either a utility or a corporate entity or an electricity trader that purchases the electricity to meet its energy needs. The buyer is often referred to as the PPA off-taker.
The following dates are the most important for a PPA:
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 date
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.
Typically the termination date is specified in the PPA. Sometimes the seller or the buyer have extension options. The buyer may also have an early termination right or a buy-back option.
The delivery points is where the sale of electricity takes place in relation to the location of the buyer and seller. The amount of Energy measured by the Project Meter as being delivered to the Delivery Point rounded downward to the nearest MWh shall be the basis for determining Delivered Energy.
Electricity rates are agreed upon as the basis for a PPA. Prices may be flat, escalate over time, indexed, variable 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.
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.
The energy invoicing under the newer types of PPAs can be increasingly complex. That is why independent power producers are turning to renewable asset management software to help them automate the task.
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