Energy Purchase

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Energy Purchase

A Power Purchase Agreement (PPA) secures the payment stream for a Build-Own Transfer (BOT) or concession project for an independent power plant (IPP). It is between the purchaser “offtaker” (often a state-owned electricity utility) and a privately owned power producer. The PPA outlined here is not appropriate for electricity sold on the world spot markets . This summary is focused on a base load thermal plant (the issues would differ slightly for mid-range or peaking thermal or hydro plants).

  • Where a government agency enters into an arrangement for a private power company to establish a power plant and sell on the power to the government agency, the public agency typically enters into a PPA.
  • The PPA usually takes the place of a BOT or concession agreement: in addition to obligations relating to the sale and purchase of the power generated, the PPA also sets out the required design and outputs and operation and maintenance specifications for the power plant.
  • Sale of capacity and energy – the power producer agrees to make available to the Purchaser the contracted capacity of energy and deliver the energy in accordance with the PPA.
  • Charges for Available Capacity and Electrical Output – the charging mechanism in the PPA is generally a pass through arrangement: the price charged for the power will consist of a charge (availability charge) to cover the project company’s fixed costs (including a return on equity for the project company) plus a variable charge to cover the project company’s variable costs. The availability charge relates to the availability of the power plant and the variable charge is calculated according to the quantity of power supplied. The purchaser will want a guaranteed long-term output from the project and so the availability charge is typically the minimum that it will be paid, provided that the plant can be shown to make sure power available.
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