Third-party power purchase agreements (PPAs) enable companies to save on electricity costs by committing to long term power agreements with independent power producers (third-parties). In recent years, more and more companies have utilized PPAs to procure renewable energy. Permission to engage in these agreements depends on your local policy environment.
Main Points
- A third-party PPA is a contractual agreement between an offtaker and an independent power producer (IPP) involving the sale of electricity over a long-term period.
- Third-party PPAs allow corporate buyers to avoid capital-intensive upfront investments, project risk, and operation and maintenance responsibility.
- Common contractual structures for PPAs include direct, physical, and virtual PPAs.
First, Understand Third-Party PPAs
Third-party PPAs are an increasingly common procurement option. In this method, the corporation enters into an agreement with a developer or IPP and commits to a pre-agreed upon price for electricity, typically for anywhere from 5 to 25 year periods. This method requires little or minimal up-front investment and the corporate buyer avoids operation and maintenance (O&M) costs as well as, importantly, project risks.
With the on-site third-party PPA model, the third party owns and operates the solar system and sells the electricity produced via the PPA to the customer at a pre-agreed upon price per kWh. This price is typically low enough to reduce the customer’s monthly (or at least annual) retail electricity bills. All other costs (and associated risks) such as for O&M, replacement parts, and insurance are the responsibility of the third-party owner. The buyer pays no or very minimal costs up-front. Also, PPAs typically include an annual “escalator” that parallels anticipated increases for grid electricity tariffs, or for inflation. Some escalators are set at a predetermined rate while others track to an index.
Read Excerpt: Renewable Energy Procurement Guidebook for Colombia by Allotrope Partners, NREL, and WRI.
Now, See This
There are three common contractual structures for a PPA: a direct PPA, a physical PPA, and a virtual PPA.
Note that virtual PPAs are often referred to as financial PPAs.
Also note that a sleeving fee refers to transmission costs, or “wheeling charges”.
See: Figure 1 from Module 2 of “Corporate Procurement of Renewables: Indonesia” by Institut Teknologi Bandung and Imperial College London.
Next, Read About Physical PPAs
With a physical PPA, or a sleeved PPA, the corporate buyer commits to a price guarantee for a long term contract with a developer, and sometimes is required to pay a sleeving fee to the utility.
Note that a sleeving fee refers to the fees utilities sometimes charge for transacting power through their networks and acting as the intermediary between the power producer and consumer.
Read Excerpt: Page 17 of Corporate Renewable Power Purchase Agreements:Scaling Up Globally by WBCSD.
Finally, Read About Virtual PPAs
A virtual PPA is typically structured as a contract for differences, where the corporate buyer commits to a price guarantee to a renewable project generator but does not directly receive the electricity itself.
Read Excerpt: Page 18 of Corporate Renewable Power Purchase Agreements:Scaling Up Globally by WBCSD.
There are advantages and disadvantages of virtual PPAs, several of which are relevant for physical PPAs also.
Read Excerpt: Page 13 of Policies for Enabling Corporate Sourcing of Renewable Energy Internationally: A 21st Century Power Partnership Report by NREL.
Suggested Actions & Next Steps
- Think it over: Think through the third-party procurement option. Is your legal department comfortable entering into long-term contracts? Have you heard of any companies engaging in PPAs in your region? Do local regulations permit PPAs?
- Write it down: Based on your initial thoughts and impressions, make a pros and cons list for each procurement method.
- Reference: Philippines Procurement Guidebook, Renewable energy snapshot: Vietnam, Colombia Procurement Guidebook, Taiwan market briefing, REC overview in China, Japan market briefing, Australian market report and USA Procurement Guidebook.