Power Pricing &Power Purchase Agreements

Important clauses in a power purchase agreement

Introduction
Electricity is essential for economic development and social well-being. Electricity is
required for the proper operation of businesses, industries, homes, schools, hospitals, and
other critical infrastructure. There is a large difference between the demand for and
availability of electricity in many emerging markets. To close the gap, a massive increase in
power generation capacity is required. This will need large investments and the Government
is increasingly recognizing the importance of collaborating with private-sector investors to
meet this capital requirement. The Power Purchase Agreement is an essential agreement for
any independent power generation project, especially in emerging markets.
What is a Power Purchase Agreement?
A power purchase agreement (“PPA”) is an agreement between two parties where one party
produces energy to sell it (producer) and the other wants to purchase the electricity
(consumer). The PPA has all contractual terms for the selling of electricity between the two
parties, usually, the producer is a private company and the consumer is a state/government-
owned company that includes when the project will start its commercial operations, when
electricity will be delivered, penalties for undersupply, payment terms, and termination. A
well-drafted PPA allows the party to reduce electricity costs that are beneficial for parties in
the long term.
Different types of Power Purchase Agreements
There are many types of PPAs, however, there are two main kinds, i.e. Physical PPA and
Virtual PPA.
Physical PPA
A physical PPA is a long-term agreement between an organisation and a third-party producer
to build, maintain, and operate a renewable energy system on the consumer’s property i.e. on-
site or off-site. In physical PPA, the consumer receives the physical transmission of
electricity at fixed prices for the agreed term and the producer takes the risk of operating the
system.
The physical PPAs are further divided into two types:
 Off-site PPA: An off-site PPA is an agreement where the consumer buys electricity
from the producer. Off-site PPAs are useful for companies, which do not have the
resources to set up an onsite power plant. The power plant is far from the
consumption point and the power is transferred through the public grid (wires).
Off-site PPAs have multiple benefits like there is no upfront cost on the company/consumer,
a variety of energy options to choose from and significant cost savings.
  On-site PPA: An onsite PPA is an agreement to purchase electricity directly from a
producer that uses consumers/company’s location to generate the electricity.
For example, any building that installs solar panels on the site. This protects against
increasing energy prices and by leasing that space, a company can receive a fixed energy
price. However, not all companies have space to accommodate the setting up of panels.
Virtual PPA
The virtual PPA is often known as “Financial PPA” because it’s simply a financial contract.
Under the virtual PPA, the power/electricity does not physically flow from the site to the
consumer. Power is sold on the wholesale electricity market at a defined location and the
consumer gets their electricity from their utility company at the company’s rate.
Benefits of Power Purchase Agreement
Power purchase agreements are the energy source of the twenty-first century. But, why these
agreements are so appealing for commercial and industrial units. PPAs enable industrial
buyers and project developers to enter into an agreement that allows the company to lock in
cost for a longer term like 20 to 25 years.
Following are the benefits of using renewable PPA for the business:
 Long Term lock-in cost
Traditional electricity costs are popular for variations due to market inconsistency. Therefore,
PPA exempts companies from these fluctuations because wind and solar energy generation
need nominal maintenance costs and companies are benefiting from the stable cost that can
be detailed in the PPA contract. This is a win-win situation for businesses as there is long-
term price stability and risks associated with the purchasing and selling of electricity have
been minimized.
 Sustainability and Environment friendly
Furthermore, consumers are encouraged to use renewable energy sources by PPAs, as there is
a defined physical supply of electricity with specific geographic characteristics. Although the
number of solar panels you can install on the roof is limited, there is no limit to the amount of
long-term energy purchase through PPAs. Consumers can take advantage of this opportunity
to make their brand more competitive and environmentally friendly and businesses will
sustainably achieve their renewable energy goals.
 Opportunity for future profit
Unlike the conventional process of buying electricity from a local utility, PPAs enable
businesses to access a much broader variety of energy suppliers, enabling them to get the best
price on the market. Power producers may be partnered with companies seeking to make a
long-term commitment to renewable energy through a financial PPA. The company can agree
with the producer for a period of 15 to 20 years to bring renewable energy. Once the project
is completed, there is an opportunity to secure future financial profit as the proceeds for the
duration of the agreement go to the company.
Essential Clauses in Power Purchase Agreement
All commercial terms for selling the energy between the two parties are specified in the PPA.
The following are essential clauses:
 Definitions
Since PPAs are technical in nature, it is important to have all of the terms specified in the
contract. The definition clause has meaning for all terms used in the agreement. It is
usually the first clause in the agreement since it defines different technical terms.
However, to avoid making a comprehensive agreement, the definitions can be added in
annexures that are attached to the agreement.
 Term of Agreement
This is also an essential clause in the PPA. The length of such a contract is generally long
ranging from 15 to 25 years. This is due to the high costs of installing power plants,
transmission lines, and power grids, etc. This clause will include details of the
commencement date, term of the agreement, early termination, and survival.
 Conditions Subsequent to be satisfied by Seller/Procurer
Conditions subsequent are the conditions that are required to be satisfied by both
producer and the consumer under the PPA. Those requirements must be met within a
certain time frame. This period is usually 12 months or more. These requirements vary by
agreement but the most common conditions in PPAs are obtaining all permits and
approval, sending notices to the contractor, etc. Both parties should agree to extend the
time period for the fulfillment of the conditions subsequent. Any amendments to the
agreement because of the above extension should be explicitly stated in this clause. If the
parties do not comply with the terms after that, they will be obliged to pay the other party
for the damages. This clause will also include joint responsibilities of the Procurer and
the Seller and consequences of non-fulfillment of conditions subsequent.
 Supply of Power
This clause is the operating clause of the agreement and it states the main function of the
agreement i.e. supply of power. Under the arrangement, the power producer agrees to
supply to the consumer the agreed energy capacity and to deliver the energy in
accordance with the PPA. This clause specifies whether the parties are entering into an
on-site PPA, off-site PPA or a virtual PPA.
 Charges for Available Capacity
In most cases, the charging process in the PPA is a pass-through arrangement. A fee to
cover the project company’s fixed costs and variable costs will be included in the power
price. The availability fee is based on the power plant’s availability, while the variable
charge is based on the amount of power delivered. Since the consumer needs long-term
production assurances from the project so the producer can charge an availability charge,
which is usually minimum, provided that the plant can be shown to make sure power is
available.
 Metering
This clause would contain information on meter installation, measuring and reading. The
price of installing the meters and calculating the electricity should be explicitly stated in
the agreement. This will also contain information about the expense bearer for the
purpose of the meter.
 Insurance
The Insurance provision requires that either or both parties have adequate insurance
coverage for the term of the agreement and that the parties provide evidence of their
insurance policy. The amount of insurance required varies depending on the risk involved
in the arrangement and the agreement’s value. This clause will include details of the
insurance to be maintained during the term of the agreement against loss or damage to the
power station or any part of the power station.
 Billing and Payment
This clause in the PPA should clearly specify the details of the payments and billing like
mode of payments, the cycle of billing, delivery of bills, payments that have already been
made, due date to make payments. There should be provision to cover the fluctuation in
the prices and any additional charges to be paid.
 Force Majeure
The clause force majeure refers to the difficulty of completing a task due to unexpected
circumstances. The force majeure clause is designed to address the non-performance of
an agreement due to unexpected situations such as war, terrorism, or epidemics. The list
can include all other incidents that are beyond the control of the parties under the
agreement. Therefore, it’s important to have this clause in the agreement under which the
parties cannot anticipate the need for termination due to unexpected events.
 Change in Law
Renewable energy sources are regulated by too many laws and are the main topic in
politics. This indicates that the structure of these laws is constantly changing. If any party
is adversely affected by a change in the law, they must inform the other party as soon as
reasonably possible after being aware of the change. This clause is also an effective
clause in the agreement. It is important to add notification of a change in laws to another
party, consequences and impact, relief available, tariff adjustment payment on account of
change in laws in order to avoid future disputes.
 Termination
The PPA must have this clause that lays down the grounds for termination. Termination
clauses, by their very nature, will give the defaulting party the option to cure the violation
in a mutually agreeable manner within a prescribed time frame, or the non-defaulting
party can take the legal route and either request specific performance of the contract or
compensation to make up for the loss suffered. Some examples of the events of defaults
are as follows:
Parties’ failure to fulfill its obligations;
Producer’s inability to provide average availability of power;
Failure by the consumer to make payment with timeline mentioned in the agreement;
Breach of representations and warranties by the parties;
Failure of any of the parties to comply with terms and conditions of the agreement.
Liability and Indemnification
The purpose of including an indemnity clause in a contract is to transfer risk or cost from
one party to the other. More specifically, it can be described as a business arrangement
between two parties in which one party is obligated to pay the other party’s expenses in
certain circumstances. This clause should have details of monetary limitation of liability,
the procedure for claiming indemnity and limitation on liability.

Conclusion
In conclusion, negotiating and achieving a satisfactory PPA is a critical phase in the
development of an electric generating plant. To avoid potential conflicts in key areas
such as transmission cost, curtailment, pricing, milestones, and termination, the PPA
should be carefully negotiated with the above clauses. PPAs provide important terms and
conditions in addition to the project’s energy price. PPA terms and conditions should be
carefully analyzed and considered, and parties approaching a PPA should consult with
lawyers to ensure that the PPA meets the project’s needs. Signing a PPA is an excellent
way to get ahead of the competition, demonstrate your commitment to sustainability, and
prepare for risks all while adding value to the business.