By - King Stubb & Kasiva on September 12, 2023
Power Purchase Agreements or PPAs, as the name suggests refer to a financial contract between an electricity generator or the seller, and a purchasing party or buyer of energy who enters into a relationship in the form of an agreement to sell and purchase energy at a pre – decided price structure for a definite period of time. Buyers can range from private individuals or companies to the various distribution companies set up by the Government.
The basic rationale behind entering into a power purchase agreement is to create a legally binding obligation between both parties so that supply and other market forces fluctuations do not cause a detrimental impact upon the business of both the parties and act as a stabilizing agent in power delivery.
There are several types of power purchase agreements that can be entered between the parties. However, majority of them overlap in terms of key clauses, obligations and liabilities created between the parties. The most common types of power purchase agreements are as follows:
The portfolio power purchase agreements consist of numerous power purchase agreements which are combined to form a single power purchase agreement. These agreements are usually entered into by large corporates or business houses which enables them to scale up their business and purchase renewable energy from one single developer operating in multiple regions.
This type of PPA offers exclusive inherent flexibility which enables both parties to modify parts of the agreements as per their own needs in consensus and therefore, become beneficial for both the parties.
In a virtual PPA (“VPPA”), there exists no physical delivery of energy, it is merely a financial contract, whereby the buyer agrees to pay a fixed price for a notional quantity of electricity, the power generator sells actual electricity in the spot market to someone else at a floating rate. If the market price exceeds the fixed price, the buyer is paid the difference, and vice versa. Accordingly, a VPPA may be characterised as a ‘contract for differences’ (CFD) or as a fixed-for-floating swap.
Since a VPPA may involve transfer of renewable energy certificates (REC), such transactions can also be structured as commodity forward contracts where RECs are priced at the difference between floating and fixed prices. It is pertinent to note that there is currently a great deal of ambiguity in the VPPA structure in India, both SEBI and the Central Electricity Regulatory Commission (“CERC”) are currently in a power-struggle over which entity would govern the trading of VPPAs.
The Supreme Court, in a judgment pronounced in October 2021, pronounced that non-transferable specific delivery contracts (NTSDs) — as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA) — will be regulated by CERC, while commodity derivatives in electricity other than NTSDs will be regulated by SEBI.
As the term suggests, physical power purchase agreements are those agreements wherein a physical delivery of power is affected from the generator/seller to the purchaser/offtaker, organizations generally execute physical PPAs for a longer duration with sellers/generators.
There are a number of clauses under PPAs that require careful consideration of the contracting such as termination clauses, performance guarantee, requirement of assurance and insurance, dispute resolution mechanism and even technical aspects such as operational overheads, delivery point i.e., geographical location where the exchange of energy shall take place, dates of payment, jurisdiction, and performance in terms of force majeure events.
It is necessary for the contracting parties to holistically define the scope and ambit of the clauses added in the agreements to avoid disputes. However, judicial intervention has often been necessitated in order to resolve disputes between parties and enable them to carry on their business.
In a recent case of Southern Power Distribution Company of AP Limited Versus Andhra Pradesh Electricity Regulatory Commission and Ors., the Hon’ble Appellate Tribunal for Electricity situated in New Delhi adjudicated a dispute wherein a formal PPA was executed between the parties defining various important clauses for effective operation and execution of the agreement. However, some clauses led to creation of a dispute between the parties which were as follows:
This was further challenged by the procurer in its case before the Tribunal wherein the observations of the commission were upheld after considering the merits of the case.
There is a huge scope of evolution in the nature, regulation and awareness of power purchase agreements. With increasing emphasis on renewable energy resources, the entry of small and medium enterprises would be a reasonable expectation.
Given the importance of PPAs and the scope of dispute between the procuring party and the energy providers, it is essential that every clause of the agreement be made in line with the objectives of the business and future of the company.
In a physical PPA, an organization signs a long-term contract with a third-party seller who agrees to build, maintain, and operate a renewable energy system either on the customer's property (on-site) or off-site and supply the power so generated to the offtaker.
With a PPA, you and your energy partner lock in at a fixed pricing structure, so you can more accurately predict energy expenses over the short and long terms. Since you agree to a fixed pricing structure upfront, you don't have to worry about hidden expenses or the financial risk of traditional energy sources.
In general, PPAs specify the process and implications of termination of the PPA (whether at the end of the term or early for reasons such as default), including the power producer's obligations regarding asset handover, the calculation of buyout prices for Independent Power Projects.