Power Purchase Agreement – explained

OVERVIEW

A power purchase agreement (PPA) is an agreement between a seller and a buyer that sets out the terms and conditions on which the seller will sell electricity to the buyer, the rights and obligations of the parties and remedies for non-performance of obligations.

 

There are many kinds of PPAs the parties can use depending on the nature of the energy generating facility and the parties involved. However, regardless of the kind of PPA being used, there are provisions that are common to all PPAs.

  • The date on which electricity delivery must begin.
  • In the case of new projects, performance or construction milestones to track the progress of the project.
  • The amount of electricity that must be delivered or purchased.
  • The price at which the electricity will be sold.
  • Events of default and remedies.
  • Credit support obligations, including guarantees and letters of credit.

 

Differences Between Renewable Energy PPAs and Fossil Fuel-Fired PPAs

PPAs for renewable energy projects include provisions that may not apply to traditional or fossil fuel-fired projects because of:

  • The intermittency and seasonality of most renewable energy resources.
  • The higher costs of electricity generated by renewable energy projects.
  • The environmental attributes and benefits of renewable energy.
  • The tax incentives and credits that are available for renewable energy projects.

 

Scalability of the Project

Many renewable energy projects (for example, wind and solar) cover a large geographic area. It is possible, therefore, for these projects to achieve commercial operation and be connected to the power grid in stages.

 

Scalability or incremental completion gives a seller the flexibility to begin commercial operation at less than the installed capacity, which can result in the project generating revenues earlier in its life cycle.

  • When must the seller complete construction and generate the capacity required under the agreement? In addition to the circumstances that typically excuse a delay in achieving commercial operations, the parties should consider the availability of the renewable energy resource and any interconnection issues that may arise which may have an impact on this schedule.
  • How will the seller be compensated for delivering the partial capacity?
  • To the extent applicable, what implications, if any, does the delivery of partial capacity have for the buyer’s obligations under its state’s renewable portfolio standard (RPS) program?

 

Guaranteed Output Obligations

Many utility-scale renewable energy PPAs allow the seller to deliver electricity on as-available basis. This means that the seller must only deliver electricity when the project is able to do so.

  • Some European countries are starting to require “forecasting” of day-ahead. If not met, there will be penalties.

 

Despite the “as available” provision, many renewable PPAs also require the seller to generate a minimum amount of electricity over a specified period (often a year). This minimum delivery obligation enables the buyer to plan and manage its energy supply. The need to provide a specific amount of energy also forces the seller to build, operate and maintain the plant at a certain level. When agreeing to a guaranteed or minimum output provision, the seller should make sure that the agreed amount takes into account variations in weather and resource availability and time required to maintain and repair the plant.

 

Pricing

The price a buyer pays under a PPA for fossil fuel-fired plants typically consists of an availability payment and an energy payment. The availability payment (also known as a capacity payment) is payable so long as the plant is available and can produce electricity whether or not it is dispatched.

  • The energy payment is the amount the buyer payments for the actual electricity that is delivered. (There is a difference between generated and delivered electricity.)

 

Renewable Energy Certificates or Green Tags (Names varies depending on countries/state. Green Certificate, White Certificate, RECs, etc)

Renewable energy certificates (RECs) represent the environmental attributes of a renewable energy project (for example, wind, solar and geothermal). Each megawatt hour (MWh) of electricity produced by a qualifying renewable energy project generally generates one REC. The PPA should it make clear whether:

  • The contracted price includes the value of the RECs.
  • The RECs are being sold separately under the PPA or a separate REC sale agreement.
  • The seller retains the full value of the RECs.
    • Some states allow RECs to be sold separately or unbundled from the electricity being sold, while other states require that the RECs be transferred to the purchasing utility.
    • For example, the California Public Utility Commission requires that all RECs be transferred to in-state utilities when the utility is the entity that is purchasing the underlying renewable energy.
    • Many utilities want to purchase the RECs either separately or as part of the contract price to enable them to meet their obligations under their state’s RPS. However, if there is a market for trading RECs and the seller thinks it can fetch a higher price by selling the RECs separately from the electricity, the seller may prefer to sell these RECs separately in the open market.
  • Guarantees of Origin (Different from RECs)
    • There is now a market in Europe to ensure where the electricity you use is produced. It is traded per MWh.

 

Transmission and Interconnection Issues

Renewable energy projects are often located far from population centers (for example, in the desert for a solar project or the prairie for a wind project). Transporting the energy generated by these plants often requires new or significant upgrades to existing transmission facilities, which can be expensive and take time to construct.

  • Given these added costs, the determination as to the place where the electricity is to be delivered (the delivery point) is even more important in renewable energy PPAs.
  • If the delivery point is far from where the electricity is generated, the buyer is responsible for transporting the electricity from a substation at the project to where it is needed.
  • By contrast, if the delivery point is on a nearby transmission grid, the seller must enter into an agreement with a transmission provider to deliver the electricity to that point.
    • Obtaining the right to connect to the transmission network is as important as obtaining other permits.

 

Curtailment Issues

Transmission lines can carry only a limited amount of electricity. As a result, not all the electricity being produced by power plants in a given area can be transported on these lines at the same time. When electricity scheduled to be delivered to the grid exceeds demand, grid operators often reduce the electricity to be provided by plants located in the balancing area. Because of their intermittent nature and the fact that they do not generally operate as base load plants, renewable energy projects may be curtailed with greater frequency than other types of plants.

 


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