We now continue by examining in detail the key provisions of the PPA agreement and key factors in the negotiation.
xFigureFinance is an independent financial advisor with a combined team experience of over 30 years. We know the renewable energy sector, the opportunities for raising capital and we are able to negotiate the best financing for the construction of photovoltaic power plants.
Conditions and clauses in PPAs
Apart from being time-consuming to negotiate, the PPA agreement is also an extremely detailed contract, the terms and conditions most commonly set out in a PPA are:
- Effective Date – this is the date on which the PPA becomes active; from that date onwards, the buyer is guaranteed that no other player will have rights to the electricity generated by the specific PV plant
- Date of commercial operation – prior to commissioning, the PV plant is subject to a number of tests and inspections to ensure that it meets the level of performance specified in the contract; after these procedures have been carried out, the power plant receives the “green light” that it is ready for operation; this date is also known as the Commercial Operation Date (COD)
- Price – the price is agreed and mentioned in the PPA; it may remain constant or increase each year, depending on the negotiations before signing
- Productivity– the power plant is required to maintain certain levels of productivity; in this case, the risk of achieving these levels is borne by the manufacturer; it should also be mentioned that the maintenance and operation costs of the power plant are also borne by the manufacturer
- Contract Termination Date – The PPA termination date is the one originally agreed upon; however, in the event of non-fulfilment of the conditions set (such as the achievement of the performance level by the power plant), the contract may be terminated; other cases in which it is possible to terminate the contract is in case of force majeure (e. g. natural disasters)
Factors, for which to be careful before signing of PPA
As the renowned PPA negotiation software and consulting company Pexapark shares in its article on PPA negotiation, several significant factors should be tracked before determining the terms and conditions of the PPA agreement:
- Trade structure
The distribution of risk between the electricity producer and the buyer is laid down in several clauses in the contract, one of which is precisely the commercial structure.
- In the event that the agreement stipulates the purchase of as much electricity as is produced, the risk is assumed not only by the producer, but also by the buyer. However, it is worth mentioning that the manufacturer is responsible for the performance of the power plant.
- An alternative option is to agree to purchase a fixed amount of energy. Then the producer assumes all the risk, being obliged to deliver the agreed amount of electricity on time.
- Risk factors
- Price risk – Fluctuation in electricity prices creates a lot of uncertainty about its negotiation in PPA agreements, which requires careful stipulation and thought before entering the negotiation stage
- Liquidity risk – a liquid market is characterized by the fact that transactions of products and services between buyers and sellers can be easily and quickly carried out without affecting market prices
- Volume risk – the power plant owner guarantees a certain amount of electricity produced when signing a PPA. In the event that it is not achieved, he will be obliged to purchase the amount of difference between the promised and produced electricity at the current market prices, which may adversely affect the producer’s business, since the market prices may be higher than the stipulated in the PPA. The solution in such a situation may be to include insurance guarantees in the contract in order to reduce the risk.
- Profile Risk – The solar industry is subject to a number of factors leading to change. An example would claim that power cannot be produced at night. However, during the day, especially with a number of active players, the huge amount of electricity produced leads to large changes in prices and, therefore, in revenues.
- Balancing risk – balancing risk arises when there is a discrepancy between the expected performance and the actual performance for the day. The costs associated with it can be balanced by including specific terms in the PPA contract or adding a day trading option.
- Contract duration
Here are some of the important questions you should ask before signing a power purchase agreement:
- What period is the fixed price for?
- Can it be renegotiated in the future?
- Does the PPA start on the date of commercial operation? If not, when?
- Is there an agreed grace period in case of lower production than expected for the day/month? If so, how big is it?
- Negotiating the price
As mentioned earlier, the negotiation of the PPA contract can take a long time due to its complexity. A number of things are subject to change during this time, including the price. Usually, the prices for buying and selling electricity fluctuate and change constantly, which can even affect the liquidity of the market. A possible solution could include negotiating such a fixed daily price that, at the time of signing the PPA contract, you can be sure that the agreed price reflects the market movement.
- Credit risk
A key component of a PPA agreement is the country you will partner with. Tracking their credit history and risk management can save you from having to answer questions like: What if the electricity buyer doesn’t pay on time? What if the money for the project runs out before the commercial operation date?
In such situations, the financial model is a tool that could guarantee security. The financial model prepared by us at xFigureFinance calculates income and expenses down to the smallest detail, so that at any moment you know what cash flow you will have and what would be the correct reaction in any of the above cases.
Certain clauses could be included in the contract in order to reduce this risk, such as: advance payments, keeping certain funds in stock, increased frequency of payments, bank guarantee, etc.
- Changes in laws and regulations
What if there are changes in laws and regulations affecting either country? Should such possibilities be well considered before signing a PPA agreement?
Despite the long term of traditional PPA agreements, we at xFigureFinance advise our clients to sign a PPA for a period of 1-2 years from the project.
It is worth mentioning that it is more profitable for our client to negotiate the sale of a certain percentage of the production than to give away the rights to all the electricity. In this way, he has the freedom to take advantage of market opportunities and achieve maximum revenue for his project.
The PPA agreement is a crucial component of the financing of a project for the construction of a photovoltaic power plant, as it determines the income from the production of electricity, as well as its solvency, making it the most important document in the process.
Often the financing of Solar PV project occurs by taking out a loan from a financial institution. As a debt-financed project, the PPA agreement can protect the power producer from chaotic price movements, guaranteeing it a secure income during the contract. For these reasons, the electricity buyer is extremely important due to his obligation to purchase energy for up to 25 years.
By starting work with xFigureFinance on an Solar PV project, the client receives not only a financial model that will ensure the necessary financing, but also access to the best electricity traders as his partner and buyer.