Power Purchase Agreement
Encyclopedia
Power Purchase Agreements are contracts between two parties, one who generates electricity for the purpose of sale (the seller) and one who is looking to purchase electricity (the buyer). There are various forms of Power Purchase Agreements; these are differentiated by the source of energy harnessed (solar, wind, etc.). Financing for the project is delineated in the contract, which also specifies relevant dates of the project coming into effect, when the project will begin commercial operation, and a termination date for which the contract may be renewed or abandoned. All sales of electricity are metered to provide both seller and buyer with the most accurate information about the amount of electricity generated and bought. Rates for electricity are agreed upon in the contract between both parties to provide an economic incentive to being a Power Purchase Agreement.
) electricity generating assets. The seller under the PPA is typically an independent power producer, or "IPP." Energy sales by regulated utilities
are typically highly regulated by local or state government, so that no PPA is required or appropriate. Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy.
Buyer buy the power and then he could also resale it,so in economic terms,buyer is also called as retail purchaser
determines which facilities are considered to be exempt wholesale generators or qualifying facilities and are applicable for PPAs under the Energy Policy Act of 2005
.
. The SPPA relies on financing partners with a "tax appetite," profits that are subject to taxation, who can benefit from the federal tax credit. Typically, the investor and the solar services provider create a special purpose entity that owns the solar equipment. The solar services provider finances, designs, installs, monitors, and maintains the project. As a result, solar installations are easier for customers to afford because they do not have to pay upfront costs for equipment and installation. Instead, customers pay only for the electricity the system generates. With the passage of the American Recovery and Reinvestment Act of 2009
the solar investment tax credit can be combined with tax exempt financing, significantly reducing the capital required to develop a solar project.
in July 2010; Wasatch Wind will produce wind power in its newly developed Pioneer Wind Park
, and PacifiCorp will purchase it.
from entering into a contract longer than ten years. PPA contracts, particularly for larger systems, need at least a 20 year term. In 2009, the United States Senate Committee on Energy and Natural Resources
passed S. 1462, which among other things, would have allowed federal agencies to enter into power purchase agreements for renewable energy for up to 30 years.
However, the United States Department of Defense
has a separate authority to enter into energy contracts for as long as 30 years. Using this authority, the United States Navy
recently signed a renewable energy project for Marine Corps Air Station Miramar
. All agencies of the US Government are exploring methods to achieve the renewable energy requirements set forth by law.
Nellis Air Force Base
demonstrates the long term consequences of such an agreement. Completed in 2007, the Nellis Solar Power Plant
generates 30 million kilowatt-hours of electricity per year—equivalent to a quarter of the total power used at the 12,000-person base. This arrangement allows Nellis to annually avoid 22,000 tons of carbon dioxide emissions while at the same time save the Air Force over $1 million dollars in electricity costs a year.
for the project.
Under the PPA model, the PPA provider would secure funding for the project, maintain and monitor the energy production, and sell the electricity to the host at a contractual price for the term of the contract. The term of a PPA generally lasts between 5 and 25 years. In some renewable energy contracts, the host has the option to purchase the generating equipment from the PPA provider at the end of the term, may renew the contract with different terms, or can request that the equipment be removed.
One of the key benefits of the PPA is that by clearly defining the output of the generating assets (such as a solar electric system) and the credit of its associated revenue streams, a PPA can be used by the PPA provider to raise non-recourse financing from a bank or other financing counterparty.
When energy is curtailed, it is usually because one of the parties involved was at fault, which results in paid damages to the other party. This may be excused in extraordinary circumstances such as natural disasters and the party responsible for repairing the project is liable for such damages. In situations where liability is not defined properly in the contract, the parties may negotiate force majeure
to resolve these issues.
and Bonneville Power Administration
was developed as a reference for future PPAs. Solar PPAs are now being successfully utilized in the California Solar Initiative's Multifamily Affordable Solar Housing (MASH) program. This aspect of the successful CSI program was just recently opened for applications. Delmarva Power and Light company has recently entered into a WPPA with Bluewater Wind Delaware LLC.
Background
A Power Purchase Agreement (PPA) is a legal contract between an electricity generator (provider) and a power purchaser (buyer). Contractual terms may last anywhere between 15 and 20 years, and during this time the power purchaser buys energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utilityPublic utility
A public utility is an organization that maintains the infrastructure for a public service . Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies...
) electricity generating assets. The seller under the PPA is typically an independent power producer, or "IPP." Energy sales by regulated utilities
Public utility
A public utility is an organization that maintains the infrastructure for a public service . Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies...
are typically highly regulated by local or state government, so that no PPA is required or appropriate. Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy.
The Seller
Under a PPA, the seller is often the developer and owner of the technology that generates electricity. The seller may also be someone who buys electricity from another supplier for resale. Under these circumstances, another PPA may be established but will usually contain similar contractual agreements as already proclaimed in the original PPA, with the exception of some pricing mechanisms that would be redefined.The Buyer
Under a PPA, the buyer is often a utility company that purchases the electricity generated from the seller. In some circumstances, a company may be trying to meet renewable-energy portfolio standards and would be considered a retail purchaser. Under this condition, the retail purchaser may resell the electricity to another entity under a new PPA. Typically, a PPA is established between the primary seller and a utility company who is regulated to buy the electricity.Buyer buy the power and then he could also resale it,so in economic terms,buyer is also called as retail purchaser
Regulation
There are regulatory concerns associated with the implementation of renewable technologies and the agreement on contracts for producing and purchasing power. The Federal Energy Regulatory CommissionFederal Energy Regulatory Commission
The Federal Energy Regulatory Commission is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates, hydroelectric licensing, natural gas pricing, and oil pipeline rates...
determines which facilities are considered to be exempt wholesale generators or qualifying facilities and are applicable for PPAs under the Energy Policy Act of 2005
Energy Policy Act of 2005
The Energy Policy Act of 2005 is a bill passed by the United States Congress on July 29, 2005, and signed into law by President George W. Bush on August 8, 2005, at Sandia National Laboratories in Albuquerque, New Mexico...
.
Types of PPAs
There are different types of PPAs according to the type of technology utilized in the electricity generation process.Solar PPAs
In the United States, the Solar Power Purchase Agreement (SPPA) depends heavily on the existence of the solar investment tax credit, which was extended for eight years under the Emergency Economic Stabilization Act of 2008Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
. The SPPA relies on financing partners with a "tax appetite," profits that are subject to taxation, who can benefit from the federal tax credit. Typically, the investor and the solar services provider create a special purpose entity that owns the solar equipment. The solar services provider finances, designs, installs, monitors, and maintains the project. As a result, solar installations are easier for customers to afford because they do not have to pay upfront costs for equipment and installation. Instead, customers pay only for the electricity the system generates. With the passage of the American Recovery and Reinvestment Act of 2009
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009, abbreviated ARRA and commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted by the 111th United States Congress in February 2009 and signed into law on February 17, 2009, by President Barack Obama.To...
the solar investment tax credit can be combined with tax exempt financing, significantly reducing the capital required to develop a solar project.
Wind PPAs
Wind Power Purchase Agreements (WPPAs) are not found quite as prolifically as their solar counterparts, but they do exist. Wasatch Wind in Wyoming entered into a twenty year WPPA with PacifiCorpPacifiCorp
PacifiCorp is an electric power company in the northwestern United States.PacifiCorp has three primary subsidiaries:# Pacific Power is a regulated electric utility with service territory throughout Oregon, northern California, and southeastern Washington.# Rocky Mountain Power is a regulated...
in July 2010; Wasatch Wind will produce wind power in its newly developed Pioneer Wind Park
Wind farm
A wind farm is a group of wind turbines in the same location used to produce electric power. A large wind farm may consist of several hundred individual wind turbines, and cover an extended area of hundreds of square miles, but the land between the turbines may be used for agricultural or other...
, and PacifiCorp will purchase it.
Federal PPAs
Current law restricts most of the Federal government of the United StatesFederal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
from entering into a contract longer than ten years. PPA contracts, particularly for larger systems, need at least a 20 year term. In 2009, the United States Senate Committee on Energy and Natural Resources
United States Senate Committee on Energy and Natural Resources
The United States Senate Committee on Energy and Natural Resources has jurisdiction over matters related to energy and nuclear waste policy, territorial policy, native Hawaiian matters, and public lands....
passed S. 1462, which among other things, would have allowed federal agencies to enter into power purchase agreements for renewable energy for up to 30 years.
However, the United States Department of Defense
United States Department of Defense
The United States Department of Defense is the U.S...
has a separate authority to enter into energy contracts for as long as 30 years. Using this authority, the United States Navy
United States Navy
The United States Navy is the naval warfare service branch of the United States Armed Forces and one of the seven uniformed services of the United States. The U.S. Navy is the largest in the world; its battle fleet tonnage is greater than that of the next 13 largest navies combined. The U.S...
recently signed a renewable energy project for Marine Corps Air Station Miramar
Marine Corps Air Station Miramar
Marine Corps Air Station Miramar , formerly Naval Air Station Miramar is a United States Marine Corps installation that is home to the 3rd Marine Aircraft Wing, which is the aviation element of the 1st Marine Expeditionary Force...
. All agencies of the US Government are exploring methods to achieve the renewable energy requirements set forth by law.
Nellis Air Force Base
Nellis Air Force Base
Nellis Air Force Base is a United States Air Force Base, located approximately northeast of Las Vegas, Nevada. It is under the jurisdiction of Air Combat Command .-Overview:...
demonstrates the long term consequences of such an agreement. Completed in 2007, the Nellis Solar Power Plant
Nellis Solar Power Plant
The Nellis Solar Power Plant is located within Nellis Air Force Base in Clark County, Nevada, on the northeast side of Las Vegas. The Nellis solar energy system will generate in excess of 25 million kilowatt-hours of electricity annually and supply more than 25 percent of the power used...
generates 30 million kilowatt-hours of electricity per year—equivalent to a quarter of the total power used at the 12,000-person base. This arrangement allows Nellis to annually avoid 22,000 tons of carbon dioxide emissions while at the same time save the Air Force over $1 million dollars in electricity costs a year.
Other PPAs
Other PPAs will become commercially available once the technology has been established and the market exists for such contractual agreements to be effective. Geothermal PPAs are being explored; their difference from wind and solar PPAs is that the actual gathering of energy would require much more active monitoring and servicing.Financing
The PPA is often regarded as the central document in the development of independent electricity generating assets (power plants), and is a key to obtaining project financingProject finance
Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors...
for the project.
Under the PPA model, the PPA provider would secure funding for the project, maintain and monitor the energy production, and sell the electricity to the host at a contractual price for the term of the contract. The term of a PPA generally lasts between 5 and 25 years. In some renewable energy contracts, the host has the option to purchase the generating equipment from the PPA provider at the end of the term, may renew the contract with different terms, or can request that the equipment be removed.
One of the key benefits of the PPA is that by clearly defining the output of the generating assets (such as a solar electric system) and the credit of its associated revenue streams, a PPA can be used by the PPA provider to raise non-recourse financing from a bank or other financing counterparty.
Effective Date
The PPA is considered contractually binding on the date that it is signed, also known as the effective date. Once the project has been built, the effective date ensures that the purchaser will buy the electricity that will be generated and that the supplier will not sell its output to anyone else except the purchaser.Commercial Operation
Before the seller can sell electricity to the buyer, the project must be fully tested and commissioned to ensure reliability and comply with established commercial practices. The commercial operation date is defined as the date after which all testing and commissioning has been completed and is the initiation date to which the seller can start producing electricity for sale (i.e. when the project has been substantially completed). The commercial operation date also specifies the period of operation, including an end date that is contractually agreed upon.Preemptive Termination Date
Typically, termination of a PPA ends on the agreed upon commercial operation period. A PPA may be terminated if abnormal events occur or circumstances result that fail to meet contractual guidelines. The seller has the right to curtail the deliverance of energy if such abnormal circumstances arise, including natural disasters and uncontrolled events. The PPA may also allow the buyer to curtail energy in circumstances where the after-tax value of electricity changes.When energy is curtailed, it is usually because one of the parties involved was at fault, which results in paid damages to the other party. This may be excused in extraordinary circumstances such as natural disasters and the party responsible for repairing the project is liable for such damages. In situations where liability is not defined properly in the contract, the parties may negotiate force majeure
Force majeure
Force majeure or vis major "superior force", also known as cas fortuit or casus fortuitus "chance occurrence, unavoidable accident", is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of...
to resolve these issues.
Operation and Metering
Maintenance and operation of a renewable technology project is the responsibility of the seller. This includes regular inspection and repair, if necessary, to ensure prudent practices. Liquidated damages will be applied if the seller fails to meet these circumstances. Typically, the seller is also responsible for installing and maintaining a meter to determine the quantity of output that will be sold. Under this circumstance, the seller must also provide real-time data at the request of the buyer, including atmospheric data relevant to the type of renewable technology installed.Delivery Point
The PPA will distinguish where the sale of electricity takes place in relation to the location of the buyer and seller. If the electricity is delivered in a "busbar" sale, the delivery point is located on the high side of the transformer adjacent to the project. In this type of transaction, the buyer is responsible for transmission of the energy from the seller. Otherwise, the PPA will distinguish another delivery point that was contractually agreed on by both parties.Pricing
Electricity rates are agreed upon as the basis for a PPA. Prices may be flat, escalate over time, or be negotiated in any other way as long as both parties agree to the negotiation. A PPA will often specify how much energy the supplier is expected to produce each year and any excess energy produced will have a negative impact on the sales rate of electricity that the buyer will be purchasing. This system is intended to provide an incentive for the seller to properly estimate the amount of energy that will be produced in a given period of time.Billing and Payments
The PPA will also describe how invoices are prepared and the time period of response to those invoices. This also includes how to handle late payments and how to deal with invoices that became final after periods of inactivity regarding challenging the invoice. The buyer also has the authority to audit those records produced by the supplier in any circumstance.Performance initiatives
The buyer will typically require the seller to guarantee that the project will meet certain performance standards. Performance guarantees let the buyer plan accordingly when developing new facilities or when trying to meet demand schedules, which also encourages the seller to maintain adequate records. In circumstances where the output from the supplier fails to meet the contractual energy demand by the buyer, the seller is responsible for retributing such costs. Other guarantees may be contractually agreed upon, including availability guarantees and power-curve guarantees. These two types of guarantees are more applicable in regions where the energy harnessed by the renewable technology is more volatile.Example Contracts
A basic sample PPA between the United States Department of EnergyUnited States Department of Energy
The United States Department of Energy is a Cabinet-level department of the United States government concerned with the United States' policies regarding energy and safety in handling nuclear material...
and Bonneville Power Administration
Bonneville Power Administration
The Bonneville Power Administration is an American federal agency based in the Pacific Northwest. BPA was created by an act of Congress in 1937 to market electric power from the Bonneville Dam located on the Columbia River and to construct facilities necessary to transmit that power...
was developed as a reference for future PPAs. Solar PPAs are now being successfully utilized in the California Solar Initiative's Multifamily Affordable Solar Housing (MASH) program. This aspect of the successful CSI program was just recently opened for applications. Delmarva Power and Light company has recently entered into a WPPA with Bluewater Wind Delaware LLC.