Power purchase agreement
A power purchase agreement (PPA), or electricity power agreement, is a contract between two parties, one which generates electricity (the seller) and one which is looking to purchase electricity (the buyer). The PPA defines all of the commercial terms for the sale of electricity between the two parties, including when the project will begin commercial operation, schedule for delivery of electricity, penalties for under delivery, payment terms, and termination. A PPA is the principal agreement that defines the revenue and credit quality of a generating project and is thus a key instrument of project finance. There are  many forms of PPA in use today and they vary according to the needs of buyer, seller, and financing counter parties. Contractual terms of a PPA may last anywhere between 5 and 20 years, during which 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 utility) electricity generating assets. The seller under the PPA is typically an independent power producer, or "IPP." In the case of distributed generation (where the generator is located on a  building site and energy is sold to the building occupant), commercial PPAs have evolved as a variant that enables businesses, schools, and governments to purchase electricity directly from the generator rather than from the utility. This approach facilitates the financing of distributed generation assets such as photovoltaic, micro-turbines, reciprocating engines, and fuel cells. Parties involved. The seller. Under a PPA, 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 non-recourse project financing. The buyer. Under a PPA, the buyer is  typically a utility or a company that purchases the electricity to meet its customers' needs. In the case of distributed generation involving a commercial PPA variant, the buyer may be the occupant of the building—a business, school, or government for example. Electricity traders may also enter into PPA with the Seller. Regulation. United Kingdom. In the UK, PPAs are regulated by the Department for Business, Energy & Industrial Strategy (BEIS). United States. In the United States, PPAs are typically subject to regulation by the Federal Energy Regulatory Commission (FERC). FERC determines which facilities are applicable for PPAs under the Energy  Policy Act of 2005. PPAs facilitate the financing of distributed generation assets such as photovoltaic, microturbines, reciprocating engines, and fuel cells. PPAs are typically subject to regulation at the state and federal level to varying degrees depending on the nature of the PPA and the extent to which the sale of electricity is regulated where the project is sited. In the U.S., FERC determines which facilities are considered to be exempt wholesale generators (EWG) or qualifying facilities and are applicable for PPAs under the Energy Policy Act of 2005. Germany. The German Energy Agency () has argued that PPAs are central  to the German energiewende and require better regulatory support. Use. Power purchase agreements (PPAs) may be appropriate where: Financing. The PPA is often regarded as the central document in the development of independent electricity generating assets (power plants). Because it defines the revenue terms for the project and credit quality, it is key to obtaining non-recourse project financing. 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. Contract timeline. 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 delivery 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 to resolve these issues. Operation and metering. Maintenance and operation of a generation 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 technology installed. Sales. 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. In a regulated environment, an Electricity Regulator will regulate the price. 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. There is a defined timeline when PPA Provider has to send an invoice to the Generator or vice versa and if that timeline is not met then it has its own consequences, which varies from one PPA Provider to another. Performance terms. 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 Bonneville Power Administration and a wind power generating entity 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. PPAs can be managed in the European market by service providers. The legal agreements between the statewide power sectors(seller) and the trader(buyer/who buys large quantity of power) will be treated as the PPA in power sector. Data center owners Amazon, Google, and  Microsoft have used PPAs to offset the emissions and power usage of cloud computing. Some manufacturers with heavy carbon emission footprints and energy usage such as Anheuser-Busch InBev have also shown interest in PPAs. In 2017, Anheuser-Busch InBev agreed to purchase using a PPA from the utility company Iberdrola in Mexico for 220 MW of new wind farm energy. Recently, a new form of PPA was proposed to commercialize electric vehicle charging stations through a bi-lateral form of power purchase agreement.