Power purchase agreement

A Power Purchase Agreement (PPA) is a legal contract between an electricity generator (provider) and a power purchaser (host). The power purchaser purchases energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets.

The seller under the PPA is typically an independent power producer, or "IPP." Energy sales by regulated utilities are typically highly regulated, so that no PPA is required or appropriate.

The PPA is often regarded as the central document in the development of independent electricity generating assets (power plants), and is a key to obtaining project financing for the project.

Under the PPA model, the PPA provider would secure funding for the project, maintain and monitor the energy production, and sell the electricity to the host at a contractual price for the term of the contract. The term of a PPA generally lasts between 5 and 25 years. In some renewable energy contracts, the host has the option to purchase the generating equipment from the PPA provider at the end of the term, may renew the contract with different terms, or can request that the equipment be removed.

One of the key benefits of the PPA is that by clearly defining the output of the generating assets (such as a solar electric system) and the credit of its associated revenue streams, a PPA can be used by the PPA provider to raise non-recourse financingfrom a bank or other financing counterparty.

Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy.

In the United States, the solar power purchase agreement (SPPA) depends heavily on the existence of the solar investment tax credit, which was extended for eight years under the Emergency Economic Stabilization Act of 2008. The SPPA relies on financing partners with a "tax appetite," profits that are subject to taxation, who can benefit from the federal tax credit. Typically, the investor and the solar services provider create a special purpose entity that owns the solar equipment. The solar services provider finances, designs, installs, monitors, and maintains the project. As a result, solar installations are easier for customers to afford because they do not have to pay upfront costs for equipment and installation. Instead, customers pay only for the electricity the system generates. With the passage of the American Recovery and Reinvestment Act of 2009 the solar investment tax credit can be combined with tax exempt financing, significantly reducing the capital required to develop a solar project. Moreover, in certain circumstances the federal government will provide a cash grant in lieu of an investment tax credit where a financing partner with a tax appetite is not available.

Solar PPAs are now being successfully utilized in the California Solar Initiative's Multifamily Affordable Solar Housing (MASH) program. This aspect of the successful CSI program was just recently opened for applications.