Power Purchase Agreements
The power purchase agreements (“PPA”) are long-term agreements for financing a renewable energy projects. In a PPA, generally a government agency enters into a long-term contract to purchase 100% of the power generated by the system from a system owner. The system owners are generally tax investor who provides investment capital to the project for tax benefit. Such agreements help the governments to provide the energy security. The PPA defines all of the commercial terms for the sale of electricity between the two parties, including when the project will begin commercial operation, schedule for delivery of electricity, penalties for under delivery, payment terms, and termination. The article briefly touches upon the PPAs.
PPAs and the collateral Agreements
The agreement is between two parties wherein a seller designs, develop, construct, finance, insure, own, operate, maintain electricity generating station with a defined capacity. The interested party is required to undergo several rounds of negotiations and agreements with different parties in order to allow such project to run. The contracts and the agreements associated with the PPA are generally:
(a) Land Use Agreement
(b) Interconnection Agreement between the generating facility and transmission facility
(c) Net Metering Agreement
(d) Transmission Agreements, which will ensure connectivity up to the delivery point.
(e) Total Performance Bank Guarantees, which are meant to ensure that the developer is able to provide to provide guarantee for commencement of the project.
(f) Insurance cover
(g) The Environmental Impact Assessment for the site by an independent engineer
(i) Various agreements for land acquisition and Clear title documents of the acquired land
(j) Implementation Agreements
For any terms and conditions, the Electricity Act, 2003 is the governing Act.
The Covenants of the Agreements
Any power developer who is willing to enter into such agreements is required to duly complete all the activities at his own risk within a specified date, which would find place in such agreements. These include the consent, clearances required for executing such agreements. The consent and clearance is required to run for the entire period of the tenure of agreements. The energy developer is also required to enter into project financing which requires the environmental due diligence to be conducted. The power developer is also required to produce a document of clear title of land acquired by a power developer. It is very important that the project developer should be able to meet the technical requirements for the success of such projects. The metering would be done as per the Central Electricity Authority (Installation and Operations of Meters) Regulations, 2006. The power projects are required to comply with the specified grid code as well as the applicable safety rules and regulations while executing the agreements. Once the projects are complete the options available at the end of the contract year are:
- Buy out
- PPA extensions
A financial commitment is very important backbone to give a go ahead to projects. Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equity investors, known as ‘sponsors’, as well as a ‘syndicate’ of banks or other lending institutions that provide loans to the operation. They are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors.
The dispute resolution is a very important clause for the PPAs. A two-tier dispute resolution clause finds place generally in most of the agreements for dispute resolution.
Negotiating and securing an acceptable PPA is an essential step in developing a electric generating facility and should not be entered into without the advice of experienced legal counsel. PPAs include many critical terms and conditions beyond just the price for energy generated by the project. PPA terms and conditions warrant careful analysis and consideration, and parties nearing negotiations on a PPA should confer with counsel to ensure that the PPA meets the needs of the specific project