In this article, we will examine in detail a key factor in the development of a Solar project, namely the “Power Purchase Agreement” (PPA) or Agreement for the Purchase of Electricity. The Power Purchase Agreement (PPA) is a crucial component of the structuring and financing of a project for 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.
xFigureFinance is an independent financial advisor with a combined team experience of over 30 years. We know the RES sector, the opportunities to attract capital and we successfully negotiate the best financing for the construction of photovoltaic power plants.
What is PPA
A PPA is a bilateral agreement between a power producer and a power buyer.
The agreement usually includes the duration of the contract, start and end of the project and terms of sale and purchase of electricity between the two parties, penalties in case of default by the producer, method of payment and termination clause.
The duration of the PPA agreement lasts between 3 and 25 years providing:
- secure income for the electricity producer;
- promised amount of electricity to the buyer;
The electricity producer is the owner of the power plant from a renewable source, in our case – the Solar power plant.
The buyer (aka PPA Offtaker) is the party that purchases the electricity. It could be a retailer, an institution using electricity for personal use (e.g. school, hospital, government, etc.) or a large corporation aiming to reduce its carbon footprint.
Types of PPA
The type of PPA agreement is determined by the electricity buyer. Depending on this, the contract is divided into three main types: commercial, trading and corporate.
- Commercial PPA – the buyer is a type of institution (school, hospital, government, etc.) aiming to use the electricity for its own needs, purchasing it directly from the producer
- Merchant PPA – the buyer is a merchant seeking to resell the purchased electricity; the only condition in a commercial PPA is that the producer and the end user are market participants
- Corporate PPA – one of the most common types of PPA; the buyer here is a big corporate player aiming to achieve its green energy goals; more and more large companies are entering into PPAs to reduce their carbon footprint, such as Google, Apple, Amazon, etc.
Advantages and disadvantages of PPA
If we were to come to a conclusion, it would be that the benefits of PPAs are far more significant, of greater weight and outweigh the disadvantages. However, we will look at both sides to analyze the situation from every possible perspective.
The construction of a photovoltaic power plant is an investment requiring high initial costs, mainly those for CapEx (equipment), accompanied by relatively low, even insignificant, operating costs during the project.
Most often, large projects over 1 MW is being financed by a loan from a financial institution. At this stage, the expertise of xFigureFinance team could help you improve the terms so that they are in your favor and help you maximize your returns.
However, there are certain conditions and criteria that you will need to meet in order for the financial institution to be convinced of the success of the project, the realization of the intended results and the achievement of the cash flows in our financial model.
This is where the role of the PPA comes in. Its benefits are as follows:
- Provides a stable income for the producer, which reduces the risk borne by the producer;
- Provides a secure and agreed amount of electricity to the buyer for the duration of the contract;
- Being a bilateral agreement, the buyer and the producer have the freedom to negotiate the price terms between them (of course within the relevant regulations at stake) – or buying the electricity at a fixed price for the duration of the contract, or allowing flexibility depending on the current market prices;
- Revenue certainty can also protect the producer from competition selling electricity at lower prices;
The disadvantages in PPAs are far fewer, but it is nevertheless worth mentioning them, as for some this may hinder their vision of implementing a PV project. They are:
- The complexity of the nature of the PPA – due to the many significant details set out in the agreement, negotiating all the terms can take time and requires patience on the part of both parties;
- Duration – as mentioned, the PPA is in place for between 3 and 25 years, which could have a negative effect on the producer if electricity prices rise, or the buyer if prices fall;
- The producer is obliged to deliver the agreed amount of electricity on the exact day and time and in case of delay will be liable to compensate the buyer financially.
The PPA is a critical component of financing a PV power plant project, as it determines the revenue from the electricity generation as well as its solvency, making it the most important document in the process.
In the next article, we will look at conditions and factors to consider before signing a PPA.
By starting work with xFigureFinance on a Solar project, the client not only receives a financial model that will secure the necessary financing, but also access to the best electricity traders as its partner and buyer.