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 consumers
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.
PPAs 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 SEBs as statutory autonomous bodies, in other words the
Electricity Act 2003 by totally eliminating the Section of Electricity Supply Act, 1948, clearly
converts the SEBs 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
o Commissioning
o Eventuality of delay in commissioning
o Non achievement of capacity utilization of facility
o Change in law
o Terms of payment
o An event of default/ termination
o 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:
Pricing of PPA:
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 25%.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.
Industry bodies have expressed doubt over attracting investments based on the
model Power Purchase Agreement (PPA) issued by the Union power ministry.
The issue is development of power projects on a design, build, finance, operate and transfer
(DBFOT) basis. The model PPA proposes payment of a fixed charge by the utility to the
concesssionaire, revised annually to reflect 30 per cent of the variation in a composite index
comprising the wholesale and consumer price indices.
For ultra mega power projects based on imported fuel, the model PPA says the price of fuel
procured from captive mines outside India or from a long-term fuel supply contract would be the
lower of the indicative price of fuel as specified in the bid and 80/85/90 per cent of the price
computed with reference to the average API4 Index (South Africa). This price would be
increased every year at a compounded annual rate of four per cent.
R V Shahi, former Union power secretary, said the DBFOT model was unlikely to attract enough
response. Those who do so would bid with so much of risk perception that the rate of supply
offered would be excessively high. Financial closures in such projects would be nearly
impossible.
"The main thrust of the Electricity Act, 2003, is creation of an electricity market through a
competitive process and de-licensing of generation is one of the main instruments. The structure
of DBFOT runs counter to this main objective. The proposed scheme puts the whole progressive
approach in reverse gear," Shahi added.
Coal being a tradable commodity, why should the owner of a mine use his coal at a discount
for power production, supply power and then wait for payment, asks Ashok Khurana, director
general, Association of Power Producers, when he can easily sell the coal at a spot price in the
market.
"The question is why an increase at four per cent? International spot prices are subject to
fluctuation and in the past three years, they have hovered between $70 and 120 a tonne. This
formulation can lead to absurd situations of heavy losses/windfall profits, depending upon the
market movement in the six months before a bid. If the bids are invited at a time when the
market is subdued and thereafter the market shoots up, the bidder will suffer heavy losses. On the
other hand, if the market was very high and thereafter the market dips, the developer stands to
gain windfall profits. Further the rationale of four per cent compounded increase is not
understood," Khurana said.
More, says the Federation of Indian Chambers of Commerce and Industry, the present structure
of Build, Own and Operate (BOO) is more suitable to power projects instead of a DBFOT
structure. The BOO model will make it easier to finance the project, as it puts the onus of
efficient operation and maintenance of the plant on the concessionaire. Thus, the ownership and
stake of the concessionaire increases and the viability of the power project is significantly
enhanced.
Also, lenders, including State Bank of India, say the DBFOT model might be a major
disincentive to domestic and foreign lenders.
Besides, the private sector might find it difficult to take up fresh investment. The lenders say the
present PPA, a well established one, can be made more responsive by way of modifications and
additions to improve the bankability.
Conclusions:
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
