What is a PPA?
A Power Purchase Agreement (PPA) is an agreement which is setup between two parties. One party (the seller), sells their exported electricity from their renewable generating station or project, to the second party (the buyer).
The seller of the electricity is typically the owner of a renewable generation project and the buyer is typically a utility regulator or an electricity trader.
The PPA is a document that will determine the terms and arrangements of the contract for the sale of electricity. Certain headings that you are likely to come across in a PPA are terms such as:
- Effective Date
- Commercial Operation
- Payment Terms
- Contract Duration
The Effective date of a PPA sets out the date in which the contract was signed by both the buyer and seller of the electricity. This will ensure that the seller of the generated electricity does not sell to another party and only to the buyer as per the agreed contract.
The term Commercial Operation defines the commissioning of a project. Before electricity can be traded, the project must first be fully commissioned and operational. This can also be defined as the date in which all pre-commissioning tests have been completed.
The billing and payments in a typical PPA will be determined via p/kwh which is Pence per Kilowatt Hour. This will be agreed upon before the final signatures on the PPA. The price agreed can be flat, escalate or be negotiated in a common PPA. The agreement should specify how much electricity that project should expect to produce in a period of 12 months. Any excess energy produced in that period will have a negative impact on the sales rate of electricity that the buyer will be purchasing.
The duration of your PPA contract will depend on the location and size of your renewable generating station. Long term PPA’s can have a duration period of 15-20 years as these will be large scale wind developers. The pricing of these contracts can be a fixed price or renegotiated on an annual basis. Short term PPA’s will be annual contracts were the pricing will be renegotiated at the end of the 12 months.
A PPA may be terminated in the case of the guidelines set out in the contract are breached by either the buyer or the seller of the electricity. There will be a notice of termination date which will put a requirement on the seller of the electricity to give notice to the buyer of the termination. This notice period will typically be a three-month notice.
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Energy Project Financing: Resources and Strategies for Success
By Albert Thumann, Eric A. Woodroof