A power purchase agreement is a contract between two parties, one who generates electricity for the purpose of sale (the seller) and one who 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 well-structured PPA allows you to reduce electricity costs immediately and realize increased savings over time as grid electricity prices rise. Once the PPA contract period expires (typically after 15 – 20 years), you can purchase the system at a reduced price, initiate another PPA, or have the solar installation removed.
Overview of PPA Financing:
The PPA financing model is a “third-party” ownership model, which requires a separate, taxable entity (“system owner”) to procure, install, and operate the solar PV system, on a consumer’s premises (i.e., the government agency). The government agency enters into a long-term contract (typically referred to as the PPA) to purchase 100% of the. Electricity generated by the system from the system owner. Below Figure illustrates the financial and power flows. In this circle the consumer buys solar electricity from the developer and the utilliy buys unused electricity,Thus there is a continuous flow of money happening in the circle.
How Solar PPAs Work:
A solar PPA is a financing arrangement that allows businesses or government agencies to purchase solar electricity with no upfront capital cost. To achieve this, a “host” organization provides unused rooftop, land, or parking lot space as the location for a solar installation. A third party PPA provider pays for the cost of the solar installation and assumes all responsibility for the ownership, operation, and maintenance after the solar project is complete. As the host organization, you enter into an agreement to purchase the solar electricity produced by the system owned by the PPA provider at a predetermined rate per kilowatt-hour, the same unit of measurement on your standard utility bill. A well-structured PPA allows you to reduce electricity costs immediately and realize increased savings over time as grid electricity prices rise. Once the PPA contract period expires (typically after 15 – 20 years), you can purchase the system at a reduced price, initiate another PPA, or have the solar installation removed.
As per Electricity Act, 2003 following is the Sections dealing with Power Purchase Agreement.
Functions of State Commission
The State Commission shall discharge the following functions, namely:
Regulate electricity purchase and procurement process of distribution licensees including the price at which electricity shall be procured from the generating companies or licensees or from other sources through agreements for purchase of power for distribution and supply within the State;
Section 49 of The Electricity Act, 2003 deals with agreement for the purchase and supply of electricity.
Agreements with respect to supply or purchase of electricity
Where the Appropriate Commission has allowed open access to certain consumers under section 42, such consumers, notwithstanding the provisions contained in clause (d) of sub-section (1) of section 62, may enter into an agreement with any person to supply or purchase of electricity on such terms and conditions (including tariff) as may be agreed upon by them.
PPA’s are entered between the state electricity boards and the independent power producers. The Electricity Act 2003 makes it mandatory for all SEBs to unbundle into separate generation, transmission and distribution entities so as to make them more efficient than vertically integrated utilities. However, in most countries, vertically integrated utilities continue to remain better financial performers and are better able to meet customer needs.
The Electricity Act, 2003 completely eliminates Section 5 of the Electricity (Supply) Act, 1948, thereby abolishing the existence of SEB’s as statutory autonomous bodies, in other words the Electricity Act 2003 by totally eliminating the Section of Electricity Supply Act, 1948, clearly converts the SEB’s into Companies under the Company Act 1956.
Few Advantages of PPA financing are:
There is a process of implementing PPA, in various projects involving an array of discussion, meetings and framing of policies. Execution of a PPA requires the following project coordination efforts.
Step 1. Project Eligibility assessment and Bid Participation : Once the location is identified for the PV installation. Review of the eligibility of the developers for participation in the project allotment process. All the developers must meet both Technical & Financial criteria for eligibility as specified in the regulations.
Step 2. Project Registration & Issue a Request for Proposal: Upon meeting the required eligibility criteria, the project developer needs to register with the Program Administrator (IREDA) for allotment of the project.
Step 3. Project allotment/Letter of Intent: A letter of intent is provided to all successful bidders from the nodal agency. The LOI covers the timelines for the project completion.
Step 4. Power Purchase agreement signing: The PPA is an agreement between the developer and the local distribution utility for sale/deemed sale of power from the project. The PPA is to clearly specify the rate of power & the tenure of the PPA. The PPA is to be drafted as per the guidelines of MNRE/IREDA and tariff orders of the RREC. The key features of the PPA include provisions for
- Eventuality of delay in commissioning
- Non achievement of capacity utilization of facility
- Change in law
- Terms of payment
- An event of default/ termination
- Sharing of CDM benefits (if availed)
Step 5. G B I Certificate: Developer to get certificate for eligibility for Generation based Incentive claim within 1 month of signing of the Power Purchase Agreement.
Government support to solar sector – A right framework has been put In-place The Government has proactively supported the development of sustainable energy solutions as part of the eight missions under the National Action.Plan for Climate Change Initiative. The Jawaharlal Nehru National Solar Mission (JNNSM) is a transformational initiative for solar energy development in India. The mission targets to propel India as a solar hub with 20,000 MW of grid connected solar power capacity by 2022. A snapshot of the market support available to solar solar sector is shown below:
The most common PPA pricing scenarios are fixed price And fixed escalator. In a fixed-price scheme, electricity Produced by the PV system is sold to the government agency at a fixed rate over the life of the contract.Note that it is possible for the PPA price to be higher than the utility rate at the beginning. However, over time, the utility rate is expected to overtake the PPA price such that the PPA generates positive savings over the life of the contract. This structure is most favorable when there is concern that the utility rates will increase significantly.
In a fixed-escalator scheme, electricity produced by the system is sold to the government agency at a price that increases at a predetermined rate, usually 2–5%.Some system owners will offer a rate structure that escalates for a time period (e.g., 10 years) and then remains fixed for the remainder of the contract. The key advantage of power purchase agreements is the predictable cost of electricity over the life of a 15- to 25-year contract.
Value of Net Metering In PPA: Net metering is one of the benefits provided by government. Net metering is very useful and encouraging for the household and small scale users install a solar system to power their houses..
Net metering means the utility company charges you the difference between what you consume from the grid and the electricity you feed into the grid. In one Net metering is a meter arrangement where only ‘excess’ of solar electricity is fed into the grid is metered.
Apart from net metering PPA also includes provisions for a consumer to buy the PV system. This can occur at any point during the life of the contract.
Financing solar PV through a power purchase agreement allows state and local governments to benefit from clean renewable energy while minimizing up-front expenditures Also important, a PPA provides a predictable electricity cost over the length of the contract. Various charges like banking, wheeling and cross subsidy charge come into the picture, but every state government focuses on a policy where there can be a tax exemption.