Power Purchase Agreement (PPA): Where to begin?
September 16, 2019 • DE Energy
By Joseph Saviour, Senior Analyst, Distributed Energy
As the costs of solar photovoltaic (PV) panels continues to decline, niche business opportunities are emerging. In addition to the traditional model of generating electricity at large-scale centralised facilities and selling to businesses, a new dynamic model of direct electricity selling is beginning to take shape.
What does a good Power Purchase Agreement (PPA) cover?
A Power Purchase Agreement is a legal contract between two parties, one which generates electricity (seller/developer) and one which is looking to purchase electricity (buyer). Take for example a solar Power Purchase Agreement (PPA). The seller arranges for the design, permitting, financing, and installation of the solar energy system on a customers property at little to no cost. The developer sells the power generated to the energy customer at a fixed rate that is typically lower than the local utility’s retail rate. PPA’s are particularly important in the renewable energy sector and are widespread in energy markets, across all types of technology.There are other benefits to this approach. Energy customers can decrease electricity losses, potentially improve reliability, resiliency and have upgradability options.
While this all sounds great, it’s important to review and understand the contents of the PPA and making sure that you are benefiting from this business transaction in the short-term and the long-term. Here are some things that you, as a energy customer, need to be looking out for while looking over your PPA:
- Ownership of the system
- Minimum electricity purchase requirements
- Clear lines between force majeure and events of default
- Regulatory environment
- Payment terms
- Contract timeline
- Operation and maintenance
- Performance terms
While this is not an exhaustive list, what’s important to remember is agreements are designed to be flexible to meet the needs of the energy customer. So it is important to prioritise what areas of the PPA you are willing to budge on and where you will hold your ground. With so many things to consider, you might be thinking whether it’s worth the trouble. Here are a couple of reasons why you should partner with a developer, like Distributed Energy, for your energy requirements:
- You get direct contracts with us to secure renewable energy production over the short and long-term.
- We provide flexibility on term duration and type of agreement. In addition to this, we also provide security of supply and transparency about the cost of electricity.
- You will be contributing to sustainability targets set by your government to reduce carbon emission in a transparent, traceable way and we will have publishable data regarding your energy savings readily available for you through our use of IoT’s.
- As someone who is running a business, you can demonstrate to customers your commitment towards environmental stewardship. This can attract new customers, investors and other key stakeholders.
- As your business grows you might have additional energy requirements. Our PPA’s are flexible and we will provide you with options to build additional renewable energy capacity.
How to choose the right Operations and Maintenance for solar rooftops ?
PPA’s typically range from 10-25 years and the developer remains responsible for the operation and maintenance of the system for the duration of the agreement. So you can see why it’s important that the developer not only has well developed metrics for assessing the functionality of the system but also has the capabilities to monitor and predict system reliability on a real-time basis. So the question is, how to select the right developer for your energy needs. The capabilities of the developer can be assessed using parameters such as number of previous projects commissioned, quality of products used in installation, how many of those customers were satisfied with the services, financial position and also the technical credibility of critical components that the developer has mentioned in the PPA i.e. in terms of monitoring electricity demand and maintenance work.
Do your Homework
Before finalising anything, do your due diligence and ask yourself the following questions (a) What products and services are offered by the developer?; (b) How many years has the developer been in this business and how many installations have been completed?; (c) Is the developer familiar with statutory requirements, state policies and regulations?; (d) How accurate is the system design and does it suit your requirements, and finally; (e) What happens if the system doesn’t produce the agreed amount of electricity and what are the limitations of the developer if the system has trouble in its operations? Let’s look at each, one by one. You want to find out the quality and make of the products being used for installation and check the warranties and guarantees offered by the developer. Remember that most solar power projects have a life of 25 years and it is important therefore, to use only quality materials and quality installations. In addition to this, find out more about the developer by checking their credentials via a certification. This is guarantee that they are a trustworthy business that adheres to sound and ethical business practices. You can also ask for the company portfolio and a list of recent projects as well as 2-3 references for you to contact. When looking at the accuracy of the initial system design, an important note to self is, the more accurate and detailed the quote for the system design is, the fewer the unexpected changes you will have to deal with during installation stage and thereafter. Lastly, get a clear idea of how the developer will measure and evaluate the performance of the plant after installation. Is the developer confident enough in his installed system that he is willing to sign a Performance Ratio/ Generation guarantee with a penalty clause for non-achievement?
With thousands of dollars of investment on the system, taking some time to ponder these points will be useful the next time you are looking for potential solar rooftop developers.
Know more about solar energy and investing in solar here.