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