A Power Purchase Agreement (PPA) often refers to a long-term electricity supply agreement between two parties, usually between a power producer and a customer (an electricity consumer or trader). The PPA builds the foundation framework and the conditions of the agreement, such as the amount of electricity supply, negotiated prices, accounting, and penalties for non-compliance. PPA is a bilateral agreement, can be of many forms and is usually implemented to the specific application. Electricity can be supplied physically or electronically on a balance sheet. PPAs help to reduce market price risks, which is why they are used by large electricity consumers to help reduce investment costs associated with planning or operating renewable energy plants.
A PPA defines and addresses the period of the agreement, the process of commission, the purchase and sale of energy and renewable energy attributes, price, curtailment, milestones and defaults, credit and insurance. The only problem with PPAs is that they are very complex and a lot of technicalities are involved when one enters into a PPA. PPAs include many critical terms and conditions beyond just the price for energy generated by the project, and parties nearing negotiations on a PPA should take legal advice to ensure that the PPA meets the needs of the specific project.
DIFFERENT TYPES OF PPAs
Stakeholders are heading pressure on firms to become more sustainable, which frequently involves adopting renewable energy to augment their electrical consumption. Because most firms do not want to shoulder the burden of building and managing their wind or solar farms, they rely on power purchase agreements (PPAs) to get renewable energy. However, because there are so many morphological traits of PPAs, it’s vital to understand how and why each one is deployed.
- VIRTUAL PPAs: The corporate buyer does not own and is not accountable for the physical electrons generated by the project in a ‘Virtual Power Purchase Agreement’ (VPPA) arrangement. The VPPA is solely a financial transaction in which a fixed-priced cash flow is exchanged for a variable-priced cash flow and renewable energy certificates (RECs). Because the VPPA is predominately financial, the buyer must still pacify its electricity need through regular ways. As a result of the VPPA, the buyer’s retail dialogue with its utility stays intact.
- PHYSICAL PPAs: A physical PPA is a long-term agreement between an organization and a third-party producer to establish, regulate, and operate a renewable energy system on or off the consumer’s land. In a physical PPA, the customer obtains physical conveyance of power at set pricing for the encompass, while the producer presupposes the risk of system operation.
- PORTFOLIO PPAs: The Portfolio PPA idea is commonly enticing to corporate buyers that want to purchase renewable energy from a range of initiatives around the country. These are crafted as a master purchase agreement, with the provisions negotiated in a solitary PPA. The deal contains a “confirm the structure”, which entails that when each project is proposed or winds down, the developer will offer confirmation, and the parties will execute each of the corroborates for each particular project. These agreements sometimes include the capacity to modify timeframes by shifting projects around, which can be pertinent.
- BLOCK DELIVERY PPAs: A physical supply of energy and Renewable Energy Certificates (RECs) to a specific area is required for a block PPA. Every hour of the term promises a designed and firmed amount of power. The buyer would often submit quantities based on its anticipated load prediction, with varying amounts in various blocks. The vendor is required to provide the consented renewable energy.
BENEFITS OF PPAs
Corporate power purchase agreements (PPAs) are becoming more popular as renewable power output grows, renewable energy prices plummet, and there is a greater incentive to decarbonize. These agreements between a commercial and industrial (C&I) client and a power generator resort the buyer to taking all output from a renewable generation asset for a fixed period, thereby nullifying the energy retail intermediary.
- COHESIVE FINANCING: PPAs enrich buyers, sellers, and the community as a whole. As consumers want more access to clean energy, the demand for funding to implement future renewable power assets continues to climb. PPAs enable generators to have projects funded and completed by guaranteeing revenue for new assets. PPAs can help C&I clients lower their carbon footprint by providing a stable and predictable supply of green energy at a more consistent price.
- GROWTH: C&I purchasers desire attractive prices and shorter-term contracts of three to five years, as well as regulatory compliance traceability. They are ideally seeking renewable PPAs that suit their demands in many markets under a single agreement. On the contrary, generators often choose fuller pricing to mitigate against market turmoil, as well as prolonged contracts of 10 years or more to produce extra revenue consistency and support continuous project funding.
- FIXED ELECTRICITY RATES: Today’s energy market is dogged by variable costs, making long-term energy planning challenging. With a PPA, you and your energy partner consent to a set electricity rate, enabling you to more consistently anticipate your energy costs in the short and long term. Because you commit to a set rate in advance, you won’t have to worry about inexplicable energy costs or the financial risk inherent in traditional energy sources.
- A PLETHORA OF OPTIONS: When it comes to traditional energy suppliers, you presumably just have one option in your area—maybe two if you’re fortunate. As a result, it is tough to optimize your possibilities and discover the greatest deal. You may hunt around for a solar energy partner eager to negotiate a fair rate with a PPA. You’re typically procuring a PPA via a private firm, so you don’t have to deal with the constraints of a regular utility company. You may investigate your alternatives and pick the partner that best matches your efficiency goals since you have more perspective.
- A DUCK SOUP REMEDY: PPAs are one of the most straightforward methods to obtain access to solar energy in today’s market. With a PPA, entities can meet their energy efficiency goals without worrying about how solar electricity is distributed to their building. The PPA supplier will manage every aspect of planning, developing, and maintaining your solar system, so all you have to do is pay your fixed fee.
CRUCIAL CLAUSES IN A PPA
- TERMINOLOGY: Since PPAs are very complex and technical there must be transparency regarding the crux of the agreement. In almost all of the acts, the second section consists of terminology or definitions. Hence, the terms and concepts of the agreement are a crucial area that should not be overlooked.
- CONDITIONS SUBSEQUENT TO BE SATISFIED BY THE SELLER/PRODUCER: Conditions subsequent are the conditions that are required to be satisfied by both producer and the consumer under the PPA. Those conditions must be satisfied within a specific time range. This time frame is frequently 12 months or longer. These limitations vary depending on the agreement, but the most typical conditions in PPAs include getting all permissions and approvals, giving notices to the contracting company, and so on. Both parties should agree to extend the time frame for the subsequent completion of the criteria. Any changes to the agreement as a result of the aforementioned prolongation shall be fully noted in this provision. If the parties do not comply with the conditions after then, they will be compelled to pay the damages to the other party.
- FORCE MAJEURE: A force majeure clause may be crucial in long-term contracts if the parties cannot anticipate the necessity for termination due to unanticipated incidents. While curtailment incorporates constraints in both the production and delivery of energy, force majeure exhibits itself in other ways, such as an incapacity to provide due to weather conditions, conflict, or seizure. As with other forms of contracts, it is critical to provide a suitably broad-ranging clause that is also robust enough to accommodate any eventuality that may emerge without being classified as an expanded right to terminate contracts for the cause.
Thus, before entering into a PPA both the parties have to be clear on which terms and conditions the parties are entering into an agreement. No terms or technical aspects should be overlooked by either of the parties as later on, it would be disastrous for both the parties. PPAs are very complex and lengthy contracts that have to be understood thoroughly, parties should hire or take advice from law firms or lawyers who have expertise in the area of PPA and the energy sector. Parties should adopt the type of PPA which is sustainable and suitable for both of them.
Author(s) Name: Varun Chetan Chikhale (Symbiosis Law School, Nagpur)