Power Purchase Agreements

Power Purchase Agreements

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What Is a Power Purchase Agreement?

A power purchase agreement is a contract between a customer and a renewable energy company. The contract allows the company to install an energy system on the customer’s property. The energy system generates power that the customer purchases for a fixed rate that is lower than the rate being charged by the electric company. The customer does not own the energy system.

PPAs typically have a duration of 10 to 20 years. Some PPAs give the customer the right to extend the contract beyond its original terms, or may even purchase the system from the developer. If the Customer does not extend the agreement or purchase the energy system, the equipment is removed from the property at the end of the lease.

Not all PPA's involve the delivery of power generated by the energy system to the customer. In an offsite PPA, that power is sold to the local grid at the current retail price. The customer and the PPA company agree on a fixed strike price for the power generated. The customer continues to pay the local utility company for electricity, but the cost is offset in part by the sale of the energy generated by the system.

Who Can Benefit from a PPA?

Some states and local jurisdictions do not allow third party ownership of energy generation systems. The customer must be located in a state that allows PPAs. But it is not a requirement that the customer own the property where the energy system will be installed. It can be a leased property, which is common when the customer is a commercial entity rather than a homeowner.

The customer benefits from being able to purchase the electricity generated by the system for less than the local utility company charges per kWh. The PPA company benefits from the federal and state tax incentives designed to encourage the development of renewable energy sources.

What is the Role of the Utility Company?

The utility company connects the renewable energy system to the power grid. During times when the system is not producing enough electricity to meet the customer’s power needs (at night and on cloudy days), the utility company provides the necessary electricity. When the renewable energy system is generating enough power, the amount in excess of what the customer needs is sold to the utility at the retail rate. This practice, which is common in many states, is called net metering.

Is There a Bonding Requirement for a PPA?

Power Purchase Agreements typically have a security requirement tied to power production. The PPA company may be required to furnish a renewable energy surety bond guaranteeing a certain amount of power production. In instances where a letter of credit is required, a performance bond can often be substituted in, eliminating the PPA company’s need to tie up collateral.

What Is an Offsite PPA?

As noted earlier, not all PPAs involve the customer accepting delivery of the power generated by a renewable energy project. In an offsite PPA, there is no physical delivery of the power the renewable energy system generates to the customer. Instead, that power is sold at the current retail price to the local grid. The customer and the project owner agree on a fixed rate price (the strike price) for the power generated. The customer continues to pay the local utility company for electricity, but some of the cost is offset by the funds received from the sale of the renewable energy generated by the system.

Is There a Bonding Requirement for a PPA?

Power Purchase Agreements typically have a security requirement tied to power production. Renewable energy surety bonds may be required. Often times, a performance bond may be provided in lieu of tying up collateral via cash or an ILOC.

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