Power Purchase Agreements Information For Business & Utility Companies
If you’re generating your own power, through gas, diesel or silent generators, solar power, wind power or any other renewable source, you could be generating extra revenue for your business, by ‘selling off’ excess power, back to the national grid, government sectors or through utility companies, using a ‘Power Purchase Agreement’ (PPA).
There are plenty of benefits to a PPA, especially if your business has excess power, due to efficiency, output of power generation or simply through under use. But what exactly is a Power Purchase Agreement and how does it work?
Our latest blog takes a look at the finer points of PPA…
What is a Power Purchase Agreement?
Effectively, a Power Purchase Agreement or ‘PPA’ is a contract between a buyer and seller of independently generated electricity.
In most cases, a PPA will involve your business (which generates it’s own electricity) selling excess power back to utility companies or government sectors. The Purchase Power Agreement is put in place to determine the commercial terms of sale for the electricity between the two parties (as afore mentioned, usually your business and electricity companies), including timescales, dates when the agreement will commence, schedule for electricity delivery, payment terms, pricing and any other legal information which may be required.
As well as this, the PPA will also include terms for penalties, on both sides, such as under delivery, termination of contract and failure to supply, so it’s worth ensuring your PPA is fair for both parties beforehand.
A Power Purchase Agreement outlines the key terms for revenue and credit, making it an important contract for both parties, helping to forecast projects and help you, as the seller determine your overall revenue generated and on what timescale.
In practice a PPA is fairly simple contract, with many in place throughout the UK, varying depending upon individual circumstances and requirements of the buyer and seller.
Who’s Involved in A Power Purchase Agreement?
Essentially, there are two parties involved in simply Power Purchase Agreements;
- The Seller: Usually the business generating the power, which will be sold back to utility companies
- The Buyer: Usually the utility company, looking to buy power from businesses
Other Terms Used in a PPA
- Independent Power Producer (IPP): This usually refers to the Seller. The IPP is simply the company, facility or individual which is producing the power. Examples of an IPP are factories which produce excess power through efficient generators, home owners who produce their own renewable energy (including excess) or dedicated Power Providers, who generate electricity for the sole purpose of selling it back to the national grid.
What is The Usual Timeline of a PPA?
The ‘effective date’ of a PPA is usually when the contract is signed by both parties. This ensures that, from the given effective date, the buyer will commit to purchasing the electricity and the supplier (your business) will produce the units required, adhering to any rules within the contract, such as selling solely to the buyer.
Commercial Operation Date
The Independent Power Producer must ensure safe operation and delivery of any electricity back to the national grid and utility company.
The ‘commercial operation’ date gives a fixed time in which you, the supplier can ensure full testing and sign off of any power generation systems used in the PPA.
Unless there are any unforeseen circumstances, a ‘termination’ date will be adhered to, which signals the end of the contract for both parties. In the run up to this, both parties may enter into new negotiations, to continue the PPA.
What Are The Benefits to Electricity Providers?
There are several benefits to your business in providing electricity as an Independent Power Provider through a PPA:
Generating Extra Revenue
The most obvious benefit of a PPA to your business is generating extra revenue. Selling your electricity to utility companies provides extra income that may otherwise go to waste, especially if your business generates excess power
Stable Revenue Streams
Buyers generally agree fixed terms through a PPA, which means that your business can secure steady revenue, with full knowledge of units sold, time frame and overall revenue generated, in advance.
A PPA is an excellent way to generate steady revenue for your business, if you can provide independent power.
Unless you’re entering into a PPA with the sole purpose of generating power to sell, your business will benefit from reduced waste.
Otherwise wasted power or underused power outputs can be utilised to generate revenue. Using excess power can help improve your business sustainability statisics, by improving overall efficiency.
Initially a PPA may seem a little confusing and stressful, which is where outsourcing can become beneficial. By using an intermediary, your business could generate extra revenue through a Purchase Power Agreement, without having to source or manage buyers.
What Are The Benefits to Electricity Buyers in a PPA?
Using a PPA, companies can secure fixed costs for electricity purchased through the agreement.
For utility companies, this means they can forecast profit and loss against any power provided through the agreement, ensuring mid-long term stability for the business.
In some cases, particularly during planning phases, a fixed energy cost can help forecast budgets, such as for public sector projects, where a set price is needed to determine the overall spend involved. In contrast, ‘normal’ energy sources may offer fluctuating pricing, which means forecasting is more difficult.
Reduced Inflation Affects
Fixed costs also reduce the impact of inflation on buyers. By entering into a PPA, utility companies can secure power at a fixed rate for a given time period, ensuring there are no adverse affects on pricing, should general fuel prices increase.
Up-Scaling of Supply
By making use of Independent Power Producer an energy company can quickly upscale it’s power supply where necessarily, without the need for investment in long term infrastructure. This provides an excellent short-mid term solution, especially when bridging the gap between demand and future supply plans.
Purchase Power Agreements allow electricity companies to buy sustainable energy and meet their environmental requirements. In most cases, the power your business produces itself, through generators or CHP Cogeneration is incredibly efficient, which is highly attractive to electricity companies.
Individuals selling to an electricity company will usually be generating their power from renewable sources, in most cases residential solar power, biomass or wind power. Again, this is an attractive, beneficial power source for utility companies, looking to reduce the carbon footprint of their supply.
Operating and Metering Your Power Supply
Throughout the term of the PPA, it is the sellers responsibility to ensure the full operation and maintenance of power generation systems, ensuring stable supply of electricity under the terms agreed.
This usually includes general maintenance, repair and inspection of generators, solar power or wind generation to ensure it’s continual operation. As well as this, it’s usually up to the seller to install an effective metering system, to quantify and monitor the amount of electricity supplied.
An effective cloud based remote monitoring system can ensure efficient operation, providing both parties with real time data, helping to keep your PPA running smoothly.
Does Your Business Qualify for a PPA?
At PCAS Ltd we can provide a free site assessment to discuss your needs and potential qualification for generating revenue through a PPA.
What’s more, we can also act as intermediaries, reducing your paperwork and helping to source credible buyers throughout the UK.