enkumo ppa energy digital energy

What are PPAs and 4 tips to keep in mind

Have you ever wondered how does the whole generation and supply of electricity works? Don’t worry the whole thing is not as complicated as it might look. The thing is a lot of people use fancy language to convey very simple concepts. One of the biggest cogs in the whole electricity wheel are PPAs, it stands for Power Purchase Agreement and is present at the center of the whole electricity transaction.

PPAs are basically contracts between two or more parties, but in this case, the role of the parties is largely defined. One side of the contract is the party that generates electricity and the other side is the party looking to buy that electricity. The agreement contains all the necessary details and small issues that might arise during the whole transaction. 

One of the most important detail stipulated in the contract is the time period for which the contract is valid for, now, it is not necessary for the time period to be over a certain limit, but the industry standard usually calls for a minimum of 5 years. One of the other important factors to consider is the price at which the parties have settled at and the quantity of the electricity which is need by the buyer on top of this what would happen if one of the parties does not abide by the terms of the contract. 

PPAs have been gaining popularity in the independent power producer market, also known as IPP, in which a state or government owned company or any organization can come into an agreement with an independent producer of electricity for buying a certain amount at a pre-determined cost. They have also helped local building or organizations such as colleges, schools, offices to be able to buy electricity directly from the local grid at a possibly lower cost using an agreement in which the IPP gets to install solar panels for example in the building itself, this way the organization does not have to actually buy the solar panels. Some other person who is generating the electricity will do so while in exchange that IPP is getting land and a customer to buy the electricity. This way the organization gets to save money and so does the IPP.  

If you have been thinking about buying energy or getting into a PPA there are some tips, tricks and things you should keep in mind. The buyer of electricity in some cases is also known as the offtaker and he or she needs to make some important decisions before signing a PPA.

Power Demand

You need to know the power demand that you have currently and what the graphs are saying about future growth, it is better to know the exact details and numbers when it comes to the future and current demand. This gives you more negotiation and power and will help you to not get into an agreement which might have be re-negotiated very soon. It is also important to make preparations for future increase in the power demand, one mistake which a lot of people make is to sign an agreement not keeping in mind the future demand, they try to save money in the present and end up paying more in the future. 

Budget and Technology

These two actually go somewhat hand in hand. The budget can be affected by the distance of the place where the power is being generated as compared to the supply point. All of this is again intertwined with the technology that you choose to use. The cost of this can depend on a lot of things like the country you are in and the cost of using renewable energy systems there. For example, in some countries because of the tax breaks and subsidies given by the government it can be cheaper to use photovoltaic technology or wind energy over coal or diesel. And even if using renewable is more expensive you might want to go for a more environmentally friendly method. 

Taking Proper Legal Counsel

There is no industry standard of any one party coming up with the first draft of the PPA, it can come from any party, although it is more common for the offtaker to come up with the first draft. Of course, being the person who is buying the electricity it is important to carefully go through the entire agreement, remember you will be relying on this piece of paper for a long time and anything wrong with it can affect you pretty badly financially. That’s why take the advice and hire s qualified legal counsel who will not only go through the draft but also help you draft a better agreement if needed. Some people try to take care of this by themselves thinking they can save the costs on a lawyer but if something goes wrong in the future you will hope that you had hired someone professional.

Keeping in mind the Lender Input

If you are financing the entire project through someone else like a lender, then it is important to note that their satisfaction is also needed for the project to go through.

The demand all over the world for clean energy through PPAs have been on an increase over the past 10 years, there has been an exponential rise over corporations signing PPAs as a method for sourcing clean energy. If we look at the 109 numbers, about 100 corporations signed agreements for sourcing about 19 GW of clean energy, this was distributed over 23 countries, this was an increase of about 6 GW over 2018 numbers, tripling the amount bought in 2017. The 2019 numbers are interesting for another reason, the clean energy demand added through agreements accounted for about 10% of the total renewable energy capacity added worldwide. 

The graph shows the increase in demand for the global PPA volumes by sector over the past 10 years, we can see the exponential increase in demand.