Power Purchase Agreements

A Power Purchase Agreement PPA is a legal contract between an electricity generator and a power purchaser. Contractual terms may last anywhere between 5 and 20 years, during which time the power purchaser buys energy, and sometimes also capacity and services, from the electricity generator. Such agreements play a key role in the financing of independently owned electricity generating assets. The seller is typically an independent power producer - IPP.

PPAs Facilitate the Financing of Distributed Generation Assets

Distributed Generation occurs on a property site with energy is sold to the building occupants; here, commercial PPAs enable businesses and governments to purchase electricity directly from the generator rather than from the utility. The parties involved include:

The Seller is the entity that owns the project. In most cases, the seller is organized as a special purpose entity whose main purpose is to facilitate project financing, and

The Buyer is typically a utility or building occupants under the distributed generation scenario.

Regulations PPAs are typically subject to regulation at the state and federal level to varying degrees depending on the extent to which electricity sales are regulated where the project is sited.

Financing PPAs are the central document in the development of independent electricity generating assets; it defines project terms and credit quality and is key to obtaining non-recourse project financing.

ESCo is an energy and water service/savings company that provides design, implementation and financing of energy/water saving projects, retrofitting, conservation, infrastructure outsourcing, power generation and supply, as well as risk management.

Operations and Metering maintenance and operation of a generation project is the responsibility of the seller, including regular inspection and repair. Liquidated damages apply if the seller fails to meet these circumstances. The seller is also responsible for installing and maintaining a meter to determine the quantity of output sold.

Pricing electricity rates are agreed upon as the basis for a PPA. Prices may be flat, escalate over time, or negotiated. In a regulated environment, the Regulator will regulate the price. A PPA will often specify how much energy the supplier is expected to produce each year; any excess energy produced will have a negative impact on the sales rate of electricity that the buyer will be purchasing.

Billing and Payments PPAs describe how invoices are prepared and the time period of response. The buyer also has the authority to audit those records produced by the supplier.

Performance the buyer will require the seller to guarantee that the project meets 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.

Power Purchase Agreements and Distributed Generation Projects