Power Purchase Agreements (PPA)

Power Purchase Agreements (PPA’s) are no different from any other commercial arrangement whereby one company fixes a cost or secures supply through the technical expertise and financial support of another company.

The contracting company gains security, stability, decreased risk, specialist expertise, and a host of other benefits – while the contracted company gains a steady income stream from their investment of time and money.

What’s not to like about PPA’s?

Smart commercial companies are giving them serious consideration at the moment. Irish bank AIB plc have recently contracted a new PPA for 15 years, guaranteeing themselves supply with predetermined costs out into the future.

Traditional banks tend to be risk-averse in lending, so it’s no surprise that they are risk-averse when it comes to controlling costs too. This has particular resonance in recent months when the price of electricity has seen cumulative unsustainable price increases.

Elements of a Power Purchase Agreement (PPA)

Certain elements of a Power Purchase Agreement (PPA) will be common to different energy generation technologies, while Wind and Solar generation assets will have their own particular clauses specific to renewable energy.

Likewise, the components of any Power Purchase Agreement (PPA) would need to be specifically written for any contract between private parties, for example AIB plc and it’s long term electricity supplier.

Sale of Capacity and Sale of Energy – are principle components in a Power Purchase Agreement (PPA), whereby the customer requires an agreed level of power production capacity, and also require an agreed level of energy to be generated according to it’s own needs.

Pricing of Energy – is another principle component of a Power Purchase Agreement (PPA), and is usually broken down into (1) AVAILABILITY of power generation capacity – whether this capacity is used or not it must be available; and (2) ACTUAL POWER DELIVERED to the customer.

Third Party Sales – if the Power Purchase Agreement (PPA) is between a utility company and a private asset operator, the PPA may include clauses relating to ‘third party sales’ of electricity generated.

Underperformance or Delays in Producing Energy – the Power Purchase Agreement (PPA) may include clauses relating to non-performance by the power generation company, with relevant sanctions or penalties depending on the scale and frequency.

A Testing Regime – should be included in the Power Purchase Agreement (PPA) so that the conditions of the PPA can be independently verified for both parties.

Termination Conditions – also form an important part of any Power Purchase Agreement (PPA), whereby the conditions leading to a termination of the PPA are clearly laid out for both sides.

When to use a Power Purchase Agreement (PPA)

How do you know if a Power Purchase Agreement (PPA) is for your company?

You will be looking for a Power Purchase Agreement (PPA) when your company seeks security of supply for it’s future energy needs.

Alongside security of supply, the contracting company is seeking to control costs out into the future. Fixed costs bring certainty to the bottom line for any commercial enterprise.

Solar Power Purchase Agreement (SPPA)

The Power Purchase Agreement (PPA) will look slightly different when it comes to renewable energy such as Hydro, Wind or Solar Power.

For most companies the Solar Power Purchase Agreement (SPPA) will refer to ‘on-site‘ electricity production where the solar PV system is sited at the customers location.

Specifically, the Solar Power Purchase Agreement (SPPA) represents a financial instrument whereby the contracted party develops, owns, operates and maintains the Solar PV system at the customer site, and the customer agrees to purchase the electrical power produced by the system for a fixed period of time.

In signing a Solar Power Purchase Agreement (SPPA) the customer secures their long-term electricity supply while avoiding the upfront capital costs associated with their solar PV sytem.

The engineering design and performance related issues are also delegated to the installation company.

There are other more complex arrangements which may be covered in future articles on Power Purchase Agreements (PPA)