Monday, September 26, 2022

What Is PPA: Power Purchasing Agreement

When you hear about PPA, what comes to your mind? PPA is an acronym that represents a specific concept in the power and electricity sector.

In this article, I explain what it is, how it works, and all you need to know about it.

To ease your reading, I will begin this article with an overview. After which, I will explain how a power purchase agreement works.

Furthermore, I will state and explain the roles of those involved in PPA. Then, I will explain the types of PPA.

Subsequently, I will distinguish between a power purchase agreement and a solar purchase agreement. Then, in the same vein, I will explain the lease agreement and how it relates to the power purchase agreement.

In the next section, after this, I will state the pros and cons of a PPA. Then, I will conclude by answering some frequently asked questions on PPA.

So, read on to discover all you need to know.

What Is PPA: Overview

PPA means power purchase agreement, also known as electricity power agreement. However, a power purchase agreement (PPA) is an effective agreement between energy buyers and sellers.

It is an agreement that guarantees that an electrical energy producer will supply electricity to a particular consumer within a specific duration at a rate both parties agree on.

Nevertheless, the attention to carbon footprints and the need to adopt sustainability commitments has increased consumers’ demand for renewable energy.

Also, these consumers could be commercial, industrial, and institutional customers. Therefore, in the procurement of corporate renewable energy, its main advancement is the creation of creative structures like power purchase agreements (PPA).

Likewise, these purchases are usually long-term contracts within five to twenty years. It allows you to purchase renewable energy from large, off-site projects.

The aim of electricity for some users, especially industrial users, is for production and other industrial operations. Thus, the constant availability of this energy at the required power and voltage levels will facilitate the functions of these users.

However, the public supply might not be able to provide this stable and constant supply due to the fluctuations in the electrical system. Even so, the cost of generating energy to provide high power requirements through renewable sources could be too expensive for an individual to take care of.

Hence, there is a need for a contract agreement between the industrial and commercial users to provide electrical energy within a specific period at a rate agreed by both parties.

In addition, PPA clarifies the conditions and terms of the agreement. For instance, the amount of electricity to be supplied, price agreed on, accounting, and sanction for non-agreement.

Hence, this will yield production with less worry about electricity supply.

What Is PPA: How It Works

What Is PPA How It Works

Even more, for you to be qualified for a PPA, your project must be in a state whereby third-party ownership of energy generation equipment is allowed.

Moreover, you will compare the offers received and sign a contract to purchase power generated by solar panels or other forms of energy.

In addition, the buyer is also known as the purchaser of power. The developer and its investors own the equipment for the period of the PPA.

Furthermore, the developer provides initial project coordination services such as design, bridge financing, and permitting with little cost to the customer.

You can use PPA to reduce the risk associated with sales price; therefore, it cannot be eliminated or ignored. Likewise, it serves as an advantage for financing long-term power supply.

In addition, PPA is often implemented to help in reducing expenses. For instance, it helps in lowering market price risks.

Lastly, the system owners will retain all environmental benefits. The PPA rate usually increases each year for the contract term, and at the end of the contract term, the customer may be able to extend the term.

What Is PPA: Those Involved In PPA

A PPA involves two parties, the seller and the buyer.

The power producer (seller)

In the processing of PPA, the seller is the establishment that owns the project.

In addition, the seller is organized with a particular purpose: to promote project financing.

The power purchaser (buyer)

In processing PPA, the buyer is either a company or utility that purchases electricity to meet its customers’ demand.

However, the buyer may be the owner of a school, a business, or an organization.

What Is PPA: Types Of PPA

The different types of power purchase agreements are explained below:

Physical PPA

A direct PPA is an agreement between a power producer ( seller) and the power purchaser (buyer), who both agree on a specific price for a time.

In addition, it requires a middle man to handle the energy transfer between the two parties. Furthermore, the supply contract depends on the ability of the renewable asset.

It provides different services, which include supplying residual quantities or selling surplus quantities, balancing group management, collection of various electricity producers to its portfolio, etc.

There are three types of physical PPA. The difference between them is how the energy provider agrees to provide energy to the client.
Hence, they are stated below:

On-Site PPA

The on-site PPA gives the client direct access to power. Also, the provider’s plant is close to the client’s site or in the same vicinity.

In this case, it gives the buyer a big edge. However, most on-site power purchase agreements are corporate.

Off-site PPA

This type of PPA does not allow a direct physical supply of electricity. Instead, it is based on an agreement to purchase a physical quantity of electricity.

Moreover, the seller delivers the electricity to the buyer through the public grid.

In addition, the necessary power generation doesn’t have to be close to the consumer, enhancing flexibility.
Overall, the price of electricity is negotiable.

Sleeved PPA

This is an off-site PPA in a broader sense. In this case, the energy provider offers additional services.

These services include roping other electricity producers to its portfolio, balancing group management, forecasts, selling surplus quantities, green certificates, and risks factor accountability.

Virtual PPA

A virtual PPA is a financial contract that does not involve a required energy transfer between the seller and the buyer.

Hence, it is a financial structure whereby both the buyer and the seller agree on a specific price.

In addition, it does not deliver renewable power physically. However, the generation facility sells directly and receives from the open market price.

There is no direct conveyance between parties and no immediate adjusting sheet interface for a virtual or synthetic PPA. Even so, virtual PPA is cost-effective and more adjustable.

Overall, virtual PPA is presented in different forms, which are stated below:

  • The buyer agrees to pay a certain price.
  • The seller builds, owns, and operates the project.
  • The developer pays a positive difference to the buyer.
  • The buyer also pays the developer the difference.

Portfolio PPA

This is mostly applicable to large corporate buyers. Also, this enables a large buyer to purchase renewable energy from a host of projects in multiple regions from one developer.

It is simply a large purchase agreement into a big power purchase agreement. However, this model has inherent flexibility. Hence, it can be beneficial for both parties.

What Is PPA: Features/Factor To Consider

PPA Factor To Consider

Features

Below are the features of a power purchase agreement;

Testing regime

The design of the testing regime is to check the contract capacity, heart rate, and whether it is reliable.

Also, the testing regime is not done by just anyone but by an engineer. That is someone knowledgeable about it, and that does it better.

Project Operator

This is used for keeping records and accounts. It also includes maintenance and if there is any emergence.

An Output Charge

Consequently, an output charge is used as a reference to check electricity delivery and cover the project’s costs.

Inadequate Performance

The power purchase agreement can request the company to pay for damages if it cannot meet the required and promised electricity.

Termination

Before termination, the power purchase agreement must provide what happens to the employees. They will also provide the availability of an early termination payment.

Factor To Consider

When you want to negotiate a PPA, there are some things you need to consider, which include:

Pricing Structure

The power purchase agreement is used as a guard against future price rises. Moreover, the buyer will pay for the project’s output, and it is based on a certain price.

This means that both the buyer and seller agree on a fixed price. Lastly, it is reliable and refunding.

This is due to the fact that if the power is sold for more than the predetermined price, the project will pay the company the difference, and vice versa if it is the other way around.

Development Risk

Consequently, understanding the level of risk attached to development is important for determining investments.

Likewise, early discovery of the risk assessment during the concept and design phase will help you avoid higher risks.

Lastly, understanding the development risk will enable you to identify projects you are comfortable with.

Consumption Profile

Every company has a different profile that enhances their energy and the size of renewable generation needed to match their needs.

In addition, knowing the buyer’s accurate size and profile is important to meet the buyer’s energy.

Volume And Conditions

One of the most necessary considerations in any PPA negotiation is the volume of generation purchased and the conditions of the contract.

Although, every buyer has different reasons, and every PPA is not the same. Likewise, the volume of electricity purchased is often fixed based on the agreement of the seller and the buyer.

Lastly, it also gives room for prices to be fixed for the long term or shorter terms.

Conviction On Renewable Energy Developer

Another point you need to consider before a power purchase agreement is a conviction that the energy developer has all it takes to give you the energy you need.

To avoid spending more than necessary, try to find out from their former clients about their reliability and capacity.

Aim Of Signing A PPA

There are many reasons individuals and companies need electricity. However, companies which are industrial settings are liable to need more electrical power.

Nevertheless, you need to identify the essence of a power purchase agreement. Then, you can decide if you genuinely need it or not because of the money involvement.

However, the power purchase agreement might not solve all power-related problems. As such, you need to identify the reason for the PPA.

Similarities Between Power Purchase Agreement And Solar Power Purchase

The power purchase agreement and solar power purchase both run on a financial agreement.

The developer arranges the design and financing at a little cost.

The contract terms range from five to twenty years.

They both create opportunities.

Both the power purchase agreement and solar power purchase agreement are safe and secured.

What Is PPA: How To Leave Off A PPA

Most PPA agreements have different options, and you can get out of a PPA depending on your agreement.

Furthermore, you can leave or buy out the agreement before the full term.

Lastly, you have to be sure before you sign a PPA very. This will enable you to stay till the agreed term.

For you to know if a PPA buyout is right for you, the following are the points you need to consider:

  • Check out and understand the various financing means for you to finance the buyout.
  • Evaluate your PPA agreement.
  • Understand the different costs and risks associated with it.
  • Understand the terms and conditions associated with PPA.

What Is PPA: Lease Agreement Vs Power Purchase Agreement

 PPA

A lease agreement is a contract that outlines the terms under which one party can agree to rent an asset. Nevertheless, with a lease, you pay a fixed monthly allowance for the use of the system.

On the other hand, in a power purchase agreement, you pay for a particular duration. This is often a long-term contract between 5 to 20 years.

However, it depends on whichever suits you or the one you feel comfortable with. Moreover, if you cannot meet the required payment, you can lease a PPA.

In addition, if you are leasing a third party to own the panels, you pay the monthly and limited cost.

Furthermore, if you own PPA and the panels, you either pay off or pay back the investment, and the cost is high.

Lastly, there are advantages and disadvantages if you are leasing a PPA.

The advantages include:

  • You can avoid maintenance fees.
  • It gives room for more savings.

The disadvantages include:

  • You don’t own the property
  • You may have to pay more to break the contract.

What Is PPA: Pros & Cons

What Is PPA Pros & Cons

Pros

  • It reduces risks related to electricity purchase and sales.
  • Also, it creates opportunities.
  • In addition, since it is an agreement, it is secure.
  • Even so, it allows for third-party ownership.
  • More so, there is less cash flow.
  • Lastly, it predicts prices.

Cons

  • There could be a risk of overpayment.
  • Also, electricity production can fluctuate.
  • Even so, it requires more time to finalize.
  • Lastly, the price development can be negative.

What Is PPA: Frequently Asked Questions

Frequently Asked Questions
1. How Does A Physical Power Purchase Agreement Work?

Both the seller and the buyer use a physical power purchase agreement. Also, the seller owns, operates, and builds renewable energy, and the buyer buys energy.
The buyer is entitled to the energy and is also responsible for managing the energy.

2. What Makes PPA Bankable?

A bankable PPA is a long-term agreement between the seller and the buyer.

3. What Is PPA Revenue?

A PPA is a major agreement that defines the revenue. There are many forms of PPA in use today.
However, PPA varies according to what best suits the buyer and the seller.
It defines all the terms for the sale of power supply between the seller and the buyer.

4. What Is The Cost Savings From Using PPA?

PPA can help to save companies between 15% to 40% on their monthly power bills.
It depends on the terms and conditions of the agreement.

5. What is the meaning of a power purchase agreement?

A power purchase agreement (PPA) is an agreement in which a third-party developer installs, owns, and operates a renewable energy system on a client’s property.

6. Can you get out of a power purchase agreement?

Yes.
PPA agreements have provisions for you to terminate or buy out a contract before the full term.

7. Who signs a PPA?

The seller and the buyer.

8. What is the difference between a solar lease and PPA?

In a lease, you pay a fixed amount of money as rent for using a system. While in a PPA, you pay a fixed price for each kilowatt generated.

9. Are power purchase agreements derivatives?

No power is physically traded in a synthetic PPA. However, it functions with a derivative contract structure

10. Do renewable energy certificates expire?

Yes.
It expires within 5 calendar years.

What Is PPA: My Final Thoughts

What Is PPA My Final Thoughts

This concludes the discussion on the essential things you need to know about PPA (Power purchase agreement). It discusses all you need to know about PPA.

A power purchase agreement plays a significant part in helping to reduce the sales price risk, and it also serves as an advantage for financing a long-term power supply.

Furthermore, understanding PPA will enhance our knowledge and allow us to use it.

I hope this article is found helpful to you. Therefore, fill out the “Leave A Reply” form at the end of this article to share your thoughts.

More so, you might want to read other articles like this, then click here.

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Christian Jerome
Christian Jerome
Akan Christian writes for PowerVersity.com. He holds an HND in Electrical/Electronic Engineering. Christian enjoys reading, listening to solemn music, singing, and playing sports. For PowerVersity.com, Christian writes reviews, buying guides, and best-pick articles.

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