This article is written by Vidhya Sumra, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Electricity is essential for economic development and social well-being. Electricity is required for the proper operation of businesses, industries, homes, schools, hospitals, and other critical infrastructure. There is a large difference between the demand for and availability of electricity in many emerging markets. To close the gap, a massive increase in power generation capacity is required. This will need large investments and the Government is increasingly recognizing the importance of collaborating with private-sector investors to meet this capital requirement. The Power Purchase Agreement is an essential agreement for any independent power generation project, especially in emerging markets.
What is a Power Purchase Agreement?
A power purchase agreement (“PPA”) is an agreement between two parties where one party produces energy to sell it (producer) and the other wants to purchase the electricity (consumer). The PPA has all contractual terms for the selling of electricity between the two parties, usually, the producer is a private company and the consumer is a state/government-owned company that includes when the project will start its commercial operations, when electricity will be delivered, penalties for undersupply, payment terms, and termination. A well-drafted PPA allows the party to reduce electricity costs that are beneficial for parties in the long term.
Different types of Power Purchase Agreements
There are many types of PPAs, however, there are two main kinds, i.e. Physical PPA and Virtual PPA.
A physical PPA is a long-term agreement between an organisation and a third-party producer to build, maintain, and operate a renewable energy system on the consumer’s property i.e. on-site or off-site. In physical PPA, the consumer receives the physical transmission of electricity at fixed prices for the agreed term and the producer takes the risk of operating the system.
The physical PPAs are further divided into two types:
- Off-site PPA: An off-site PPA is an agreement where the consumer buys electricity from the producer. Off-site PPAs are useful for companies, which do not have the resources to set up an onsite power plant. The power plant is far from the consumption point and the power is transferred through the public grid (wires).
Off-site PPAs have multiple benefits like there is no upfront cost on the company/consumer, a variety of energy options to choose from and significant cost savings.
- On-site PPA: An onsite PPA is an agreement to purchase electricity directly from a producer that uses consumers/company’s location to generate the electricity.
For example, any building that installs solar panels on the site. This protects against increasing energy prices and by leasing that space, a company can receive a fixed energy price. However, not all companies have space to accommodate the setting up of panels.
The virtual PPA is often known as “Financial PPA” because it’s simply a financial contract. Under the virtual PPA, the power/electricity does not physically flow from the site to the consumer. Power is sold on the wholesale electricity market at a defined location and the consumer gets their electricity from their utility company at the company’s rate.
What are the benefits of Power Purchase Agreement?
Power purchase agreements are the energy source of the twenty-first century. But, why these agreements are so appealing for commercial and industrial units. PPAs enable industrial buyers and project developers to enter into an agreement that allows the company to lock in cost for a longer term like 20 to 25 years.
Following are the benefits of using renewable PPA for the business:
Long Term lock-in cost
Traditional electricity costs are popular for variations due to market inconsistency. Therefore, PPA exempts companies from these fluctuations because wind and solar energy generation need nominal maintenance costs and companies are benefiting from the stable cost that can be detailed in the PPA contract. This is a win-win situation for businesses as there is long-term price stability and risks associated with the purchasing and selling of electricity have been minimized.
Sustainability and Environment friendly
Furthermore, consumers are encouraged to use renewable energy sources by PPAs, as there is a defined physical supply of electricity with specific geographic characteristics. Although the number of solar panels you can install on the roof is limited, there is no limit to the amount of long-term energy purchase through PPAs. Consumers can take advantage of this opportunity to make their brand more competitive and environmentally friendly and businesses will sustainably achieve their renewable energy goals.
Opportunity for future profit
Unlike the conventional process of buying electricity from a local utility, PPAs enable businesses to access a much broader variety of energy suppliers, enabling them to get the best price on the market. Power producers may be partnered with companies seeking to make a long-term commitment to renewable energy through a financial PPA. The company can agree with the producer for a period of 15 to 20 years to bring renewable energy. Once the project is completed, there is an opportunity to secure future financial profit as the proceeds for the duration of the agreement go to the company.
Essential Clauses in Power Purchase Agreement
All commercial terms for selling the energy between the two parties are specified in the PPA. The following are essential clauses:
Since PPAs are technical in nature, it is important to have all of the terms specified in the contract. The definition clause has meaning for all terms used in the agreement. It is usually the first clause in the agreement since it defines different technical terms. However, to avoid making a comprehensive agreement, the definitions can be added in annexures that are attached to the agreement.
“Agreement” means this document, including its supplements and all documents, guidelines or standards incorporated by reference, as such may be amended from time to time.
“MW” means a megawatt.
“Party” means the Seller or Consumer”.
Term of Agreement
This is also an essential clause in the PPA. The length of such a contract is generally long ranging from 15 to 25 years. This is due to the high costs of installing power plants, transmission lines, and power grids, etc. This clause will include details of the commencement date, term of the agreement, early termination, and survival.
“Term of Agreement
This Agreement shall be valid for a term commencing from the Effective Date until the Expiry Date (“Term of Agreement”), unless terminated earlier pursuant to Article ____. Upon the occurrence of the Expiry Date, this Agreement shall, subject to Article ___, automatically terminate, unless mutually, extended by all the Parties on mutually agreed terms and conditions, at least ninety (90) days prior to the Expiry Date, subject to the approval of the Electricity Regulatory Commission.”
Conditions Subsequent to be satisfied by Seller/Procurer
Conditions subsequent are the conditions that are required to be satisfied by both producer and the consumer under the PPA. Those requirements must be met within a certain time frame. This period is usually 12 months or more. These requirements vary by agreement but the most common conditions in PPAs are obtaining all permits and approval, sending notices to the contractor, etc. Both parties should agree to extend the time period for the fulfillment of the conditions subsequent. Any amendments to the agreement because of the above extension should be explicitly stated in this clause. If the parties do not comply with the terms after that, they will be obliged to pay the other party for the damages. This clause will also include joint responsibilities of the Procurer and the Seller and consequences of non-fulfillment of conditions subsequent.
“Satisfaction of conditions subsequent by the Seller
The Seller agrees and undertakes to duly perform and complete the following activities at the Seller’s own cost and risk within ____ months from the Effective Date:
[List of activities]
Satisfaction of conditions subsequent by the Procurer
The Procurer agrees and undertakes to duly perform and complete the following activities at the Procurer’s own cost and risk within ____ months from the Effective Date:
[List of activities]”
Supply of Power
This clause is the operating clause of the agreement and it states the main function of the agreement i.e. supply of power. Under the arrangement, the power producer agrees to supply to the consumer the agreed energy capacity and to deliver the energy in accordance with the PPA. This clause specifies whether the parties are entering into an on-site PPA, off-site PPA or a virtual PPA.
“Commencement of Supply of Power to Procurer
According to the terms of this Agreement, the Seller is responsible for supplying power up to the aggregated contracted capacity by the scheduled delivery date, which is [DATE]. The Seller and the Procurer may, however, mutually agree to begin supplying power in stages beginning on the Revised Scheduled Delivery Date.
The Seller shall give the Procurer at least ____ days written notice of the date on which it intends to commence supply of power.”
Charges for Available Capacity
In most cases, the charging process in the PPA is a pass-through arrangement. A fee to cover the project company’s fixed costs and variable costs will be included in the power price. The availability fee is based on the power plant’s availability, while the variable charge is based on the amount of power delivered. Since the consumer needs long-term production assurances from the project so the producer can charge an availability charge, which is usually minimum, provided that the plant can be shown to make sure power is available.
“Allocation of Generation Capacity
The Seller shall provide ___ % of the Power Station’s Net Capacity to the Procurer as per the terms of this Agreement.
The Seller must adhere to the provisions of the relevant Law relating to Availability, including, in particular, the provisions of the Code relating to declarations of Availability and related matters.”
This clause would contain information on meter installation, measuring and reading. The price of installing the meters and calculating the electricity should be explicitly stated in the agreement. This will also contain information about the expense bearer for the purpose of the meter.
The Seller and the Procurer shall obey and be bound by the Regulations and the Grid Code as amended from time to time for meter installation, meter checking, meter calibration, and meter reading, as well as all matters incidental thereto.”
The Insurance provision requires that either or both parties have adequate insurance coverage for the term of the agreement and that the parties provide evidence of their insurance policy. The amount of insurance required varies depending on the risk involved in the arrangement and the agreement’s value. This clause will include details of the insurance to be maintained during the term of the agreement against loss or damage to the power station or any part of the power station.
During and before the Operating Period, the Seller shall effect and maintain, or cause to be effected and retained, insurances against such risks, with such deductibles, endorsements, and co-insured(s), as the Prudent Utility Practices would normally warrant the maintenance of and as needed under the Financing Agreements.”
Billing and Payment
This clause in the PPA should clearly specify the details of the payments and billing like mode of payments, the cycle of billing, delivery of bills, payments that have already been made, due date to make payments. There should be provision to cover the fluctuation in the prices and any additional charges to be paid.
For the commencement of supply, the Procurer shall pay the Seller the monthly Tariff Payment, consisting of Tariff for each Contract Year, calculated in accordance with this Article ___ and Schedule ___, on or before the Expiry Date. All Tariff Payments by the Procurer shall be in Indian Rupees.
Delivery of Monthly Bills/Provisional Bills
The Seller must provide the Procurer with a signed Monthly Bill for the preceding Month no later than ten (10) days into the following Month. If the Monthly Bill for the previous Month is released after the tenth (10) day of the following Month, the Due Date for payment of that Monthly Bill will be extended by thirty (30) days.”
The clause force majeure refers to the difficulty of completing a task due to unexpected circumstances. The force majeure clause is designed to address the non-performance of an agreement due to unexpected situations such as war, terrorism, or epidemics. The list can include all other incidents that are beyond the control of the parties under the agreement. Therefore, it’s important to have this clause in the agreement under which the parties cannot anticipate the need for termination due to unexpected events.
‘Force Majeure’ means any event or situation, including those mentioned below, that completely or partially prevent or unavoidably delays an Affected Party from performing its obligations under this Agreement, but only if and to the extent that such events or circumstances are beyond the Affected Party’s rational control, directly or indirectly.
[LIST OF ACTIVITIES]”
Change in Law
Renewable energy sources are regulated by too many laws and are the main topic in politics. This indicates that the structure of these laws is constantly changing. If any party is adversely affected by a change in the law, they must inform the other party as soon as reasonably possible after being aware of the change. This clause is also an effective clause in the agreement. It is important to add notification of a change in laws to another party, consequences and impact, relief available, tariff adjustment payment on account of change in laws in order to avoid future disputes.
“Change of Law
“Change of Law” refers to any of the following incidents occurring after the date that is seven (7) days prior to the Bid Deadline and resulting in any new recurrent or non-recurring expenditure by the Seller or any income to the Seller:
[LIST OF INCIDENTS]”.
The PPA must have this clause that lays down the grounds for termination. Termination clauses, by their very nature, will give the defaulting party the option to cure the violation in a mutually agreeable manner within a prescribed time frame, or the non-defaulting party can take the legal route and either request specific performance of the contract or compensation to make up for the loss suffered. Some examples of the events of defaults are as follows:
- Parties’ failure to fulfill its obligations;
- Producer’s inability to provide average availability of power;
- Failure by the consumer to make payment with timeline mentioned in the agreement;
- Breach of representations and warranties by the parties;
- Failure of any of the parties to comply with terms and conditions of the agreement.
“Events of Default and Termination
Seller Event of Default:
A Seller Event of Default is described as the occurrence and continuation of any of the following events unless they are caused by a Force Majeure Event, a violation by Procurer of its obligations under this Agreement, or a Procurer Event of Default:
[List of events]”
Procurer Event of Default
The occurrence and the continuation of any of the following events, unless any such event occurs as a result of a Force Majeure Event or a breach by the Seller of its obligations under this Agreement or a Seller Event of Default, shall constitute the Event of Default on the part of defaulting Procurer:
[List of events]”.
Liability and Indemnification
The purpose of including an indemnity clause in a contract is to transfer risk or cost from one party to the other. More specifically, it can be described as a business arrangement between two parties in which one party is obligated to pay the other party’s expenses in certain circumstances. This clause should have details of monetary limitation of liability, the procedure for claiming indemnity and limitation on liability.
The Seller shall indemnify, defend and hold Procurer harmless against:
The Procurer shall indemnify, defend and hold the Seller harmless against:
For PPAs, other clauses like dispute resolution clause, obligations of the parties, representations and warranties of the parties, amendment, relationship of the parties, assignments and miscellaneous which are standard clauses that are imperative to all kinds of agreement irrespective of their purpose.
In conclusion, negotiating and achieving a satisfactory PPA is a critical phase in the development of an electric generating plant. To avoid potential conflicts in key areas such as transmission cost, curtailment, pricing, milestones, and termination, the PPA should be carefully negotiated with the above clauses. PPAs provide important terms and conditions in addition to the project’s energy price. PPA terms and conditions should be carefully analyzed and considered, and parties approaching a PPA should consult with lawyers to ensure that the PPA meets the project’s needs. Signing a PPA is an excellent way to get ahead of the competition, demonstrate your commitment to sustainability, and prepare for risks all while adding value to the business.
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