Power purchase agreements
A Power Purchase Agreement (PPA) is a long-term contract to buy the electricity generated by a renewable energy installation. The contracts are arranged between the buyer (an electricity supply company or third party) and the seller (the owner or developer) of the installation.
The PPA will define the commercial terms for the sale of electricity between two parties, including when the project will begin commercial operation, the schedule for delivery of electricity, the payment terms and termination events. The PPA also provides the key revenue stream for a community renewable project and will set out the price to be paid in respect of the electricity generated, together with any payments to be made for renewable benefits.
There are a number of different forms of PPA available and terms and conditions do vary. It is recommended that a number of different suppliers are contracted to compare the offers.
A summary of the key terms present in a PPA contract are set out below. This list is not exhaustive and any PPA agreement will require specialist support and legal advice before proceeding -
ROCS - the Renewable Obligation Order is one of two subsidy regimes currently available for community renewables projects. This is usually chosen for larger projects. Suppliers agree to purchase the electricity in exchange for the ROCS, LECS or REGO credits (see below for more detail). ROCS will remain open to new entrants until 31 March 2017 and then replaced with Contracts for Difference (CfD). Before the full switch-over, new community energy projects will have a one-off choice between the two.
FITS - the second available subsidy regime is the Feed-in tariff, this is usually preferred for projects less than 5MW in size. The community renewable investors will receive income from the sale of electricity through the PPA, in addition to payments for every unit of energy generated, regardless of whether it is consumed on site e.g. a building integrated solar installation, or wind turbine in a farm setting.
REGO - A Renewable Energy Guarantee of Origin certificate is issued by Ofgem to generators that certify their electricity was generated from renewable sources. Generators will receive one REGO per MWh of electricity generated.
LEC - A Levy Exemption Certificate is issued by Ofgem to a generator as evidence their electricity is exempt from the climate change levy (CCL).
TRIAD - The TRIAD periods are defined as three half-hour periods of peak demand through Nov-Feb. There are incentives for generators to produce power during these periods. This is rewarded with an additional payment.
Term - the term of a PPA will be subject to negotiation - the market provides for both long and short term contracts. Ideally the contract will match the loan repayment schedule of the lender to ensure constant revenue and a fixed repayment schedule.
Construction and commissioning - the electricity operator purchasing the energy from the community group will look to have certainty around when electricity production will start. The PPA will contain detailed provisions around construction and commissioning.
Sale and purchase of electricity and renewable benefits - the electricity supplier purchasing the electricity will often purchase the entire metered output of the community renewable projects. In addition they will seek to receive the certificates (if the project is receiving them). In some cases the project will supply 100% of the needs of local facility or business. This would need a specific contract and is likely to be accredited under the FIT route.
Price of electricity - the price of the electricity generated by the project will be specified within the PPA. This can either be a fixed price across the lifespan of the project, aligned with the current market price for electricity, or set at a floor price.