Understanding Power Purchase Agreement and its Types
A Power Purchase Agreement (PPA) is a long-term contract between a buyer (usually a utility or major consumer) and a power producer (usually a utility company or developer of renewable energy). Because they specify the terms and circumstances for the sale and purchase of electricity, such as the cost, duration, and delivery specifics, PPAs are essential to the energy industry. These agreements are crucial for making it possible to finance and develop energy projects, especially in the fields of renewable energy like wind and solar.
The Power Purchase Agreement defines the buyer-seller relation with respect to the sale of electricity. The contract defines several important aspects, such as the price of electric power, The terms of the contract, how much energy will be delivered When and in what manner, and under what parameters will it be delivered. Expectations of the seller and buyer as to reliability, quality, and performance of power.
Power purchase agreements are particularly relevant in respect of renewable energy projects. They provide anticipated and stable cash flows to the developers of the project, which is required to attract funds to implement the large-scale project.
Types of Power Purchase Agreements
Source: Novergy
1. On-Site Versus Off-Site Power Purchase Agreement
An on-site power purchase agreement (PPA) is a contract between a power producer and a power purchaser in which the electricity is generated and consumed on the same site. This type of PPA is often used for small-scale renewable energy projects, such as rooftop solar or carport installations, where the electricity is used to power the facility where it is generated. An off-site PPA is a contract between a power producer and a power purchaser in which the electricity is generated at a different location than where it is consumed. This type of PPA is often used for large-scale renewable energy projects, where the electricity is transmitted to the power purchaser via the grid. Many community solar developers require an off-site PPA, as the electricity that is generated on the solar farm is being consumed off-site.
2. Virtual Power Purchase Agreement – Virtual PPA:
A Virtual Power Purchase Agreement (VPPA) allows a buyer to buy the renewable energy attributes of a project without taking delivery of the energy. Organizations can meet their renewable energy goals and help realize more renewable energy projects even when they do not have the combination of power generation assets or land for renewable power projects.
Many corporations reduce their carbon footprint and improve the share of renewables in their energy mix through VPPAs even though they do not have onsite renewable systems. With a VPPA, the purchaser invests in a renewable energy project and receives renewable energy certificates or credits for energy generated by the project which is a cheaper and low-risk alternative for most renewable energy solutions.
These agreements can be developed to accommodate the requirements of both parties and offer flexibility of structures. For instance, a VPPA may involve an electricity price that is constant for a number of years or a variable pricing structure that is influenced by other factors.
3. Physical Delivery Power Purchase Agreement
The Physical Power Purchase Agreement (PPA) is a contractual kind of engagement between power buyers and sellers in which the buyers get the electricity produced by a renewable energy project. Usually, this type of arrangement is suitable for primarily installed projects where the energy produced is consumed on-site. In a physical delivery PPA, a power producer commits to sell its electricity to a purchaser at an agreed fixed charge for a given time period. It may also provide conditions under which the electricity will be delivered, the participants in its transmission, and penalties for any failure to meet performance targets.
Physical delivery PPAs provide a predictable revenue stream for the producer and help the power purchaser meet their renewable energy targets. They are often used to finance renewable energy projects and can help to reduce the cost of electricity for the power purchaser for utility-scaled boosting.
4. Portfolio Power Purchase Agreement
A portfolio power purchase agreement is a contract that allows a power purchaser to purchase electricity from a portfolio of renewable energy projects, rather than a single project. This type of PPA is often used by companies that are looking to increase their renewable energy options, but do not have the resources to develop their own projects.
In a portfolio PPA, the power purchaser contracts with a portfolio provider, who is responsible for sourcing and managing the renewable energy projects that make up the portfolio. The power purchaser pays a fixed price for the electricity, and the portfolio provider is responsible for ensuring that the electricity is delivered to the power purchaser.
5. Block Delivery Power Purchase Agreements
A block delivery power purchase agreement is a contract in which the power purchaser takes delivery of electricity in predetermined blocks of time, rather than continuously. This type of PPA is often used for renewable energy projects with variable output, such as community solar projects, where the amount of electricity generated may vary over time.
Block delivery PPAs can provide a predictable revenue stream for the producer and help the power purchaser meet their renewable energy targets. They can also help to reduce the cost of electricity for the power purchaser by allowing them to purchase electricity when it is most abundant and inexpensive.
6. Green Tariffs
Green tariffs are rate schedules that are offered by utilities to their customers as an alternative to power purchase agreements with independent power producers. Green tariffs can be used to support the development of renewable energy projects and help customers meet their sustainability goals.
7. Sleeved PPA
In a sleeved PPA, an intermediary utility company handles the transfer of money and energy to and from a renewable energy (RE) project on behalf of the buyer. The utility takes the energy directly from the RE project and “sleeves” it to the buyer at its point of intake, for a fee. If the purchased renewable energy isn’t enough to meet the buyer’s energy needs, the utility is also responsible for supplying the additional power required.