Power Purchase Agreements Explained25 August 2023
A Power Purchase Agreement (PPA) is a legally binding contract that specifies the terms and conditions under which a power plant sells electricity to a buyer over a set period.
This article sets out essential aspects of a typical Power Purchase Agreement and goes over its key components and stages, and important terms.
Parties to the Power Purchase Agreement
According to the Bulgarian Rules on Energy Trading (effectively, a catalogue of the available types of agreements from the point of view of the Bulgarian energy distribution and trading system), the possible parties to a Power Purchase Agreement can be power producers, district system operators (DSOs) (also called district network operators (DNOs)), power exchange operator, energy consumers, and many more.
Private PPAs often have as parties:
- Power Producer (also known as Seller): often a renewable energy business, which owns and operates the power generation facility. This could be a solar farm, wind farm, hydroelectric plant, or a plant using any other renewable or non-renewable energy source.
- Power Purchaser (also known as Buyer): the purchaser buys the electricity generated by the producer. A purchaser could be a utility company, a private company, an industrial facility, or any final consumer.
Subject-matter of the Power Purchase Agreement
Power Purchase Agreements deal with the sale, purchase, delivery and acceptance of electricity. Key terms of a PPA are the quantity of electricity to be delivered, its price, and the length of period of the relationship. It might also cover aspects such as the delivery schedule, payment-related terms, and conditions for extension or termination.
Important Terms of the Power Purchase Agreement
Several important aspects in a Power Purchase Agreement are:
- Conditions Precedent (CPs)
A PPA typically contains conditions to its becoming fully effective.
Clear drafting of clauses about obligations such as commissioning and testing is important. With renewable energy, the Seller may be legally required to enter into an access agreement with the DSO (which grants the Seller grid access) before entering into the PPA with the Buyer.
PPAs may also include additional conditions related to construction, commissioning, financing, licences (for example licences for energy production and energy trading) and regulatory approvals.
It is important to clearly specify the consequences of failure to meet any of the conditions precedent, considering the potential liability or the option to terminate. Some conditions may have fixed deadlines, while others may be extendable.
- Electricity Price
In Bulgaria, electricity prices in a PPA can be broadly:
- Regulated by the State Commission for Regulation of Energy and Water (SCREW)
- Freely negotiated, or
- Set by methods approved by SCREW.
With freely negotiated prices, the Buyer and the Seller can choose a fixed price or a price determined by a formula, which may be linked to market rates.
- Contract Duration
PPAs typically span 10 to 25 years, and are often aligned with the duration of the financing terms of the Seller’s project. A PPA may also improve access to financing for the project owner or developer, offering a reliable, long-term revenue source.
Risk mitigation associated with Power Purchase Agreements
While PPAs offer substantial benefits to both Sellers and Buyers, parties may wish to consider the risk that the Buyer may not be able to generate/deliver the agreed quantity and/or the Seller may not be able to accept it and/or pay.
The below risk events need to be incorporated into the PPA and the Parties need to agree on how to mitigate such risks:
- Regulatory and Policy Changes: Shifts in government policies, regulations, combined with shifts in market dynamics may affect the financial viability of the project during the agreement’s term.
In such cases, the Parties may need to include in the PPA the possibility to renegotiate the price or other terms so that such events do not render the PPA unworkable
- Contractual Non-Compliance: Failure to adhere to the PPA’s terms and conditions which may lead to penalties, legal disputes, or even agreement termination
- Force Majeure Events: Unforeseen events, such as natural disasters may disrupt the power plant’s operation or the power purchaser’s ability to pay and/or accept the delivered quantity, leading to potential conflicts.
It may be advisable that the PPA includes clauses allowing both the Seller and the Buyer to claim force majeure relief if the events are beyond the the Buyer’s control and are preventing it from generating electricity; and if the Seller is unable to take the delivered quantity and/or to pay.
By working with NBLO’s energy law team, clients can confidently navigate the intricacies of PPAs, safeguard their interests, and reduce the risk of project obstacles.
Contact us via our contact form or email us at [email protected] to learn more about how we can assist you with PPAs and how we can address your energy-related legal needs.