Power purchase agreements are in high demand in the USA. It paves the way for your cost-effective decarbonisation without maintenance and other responsibilities. That’s why “how to get a power purchase agreement in the USA” has become a common question. Are you asking the same question? We are here to answer.
In this article, we will provide an in-depth guide on getting a PPA. It also includes information about PPA, their types, and how to avail them with a win-win negotiation if you are considering signing a PPA agreement. Read through each word of the article.
Understanding Power Purchase Agreement
How does a power purchase agreement work? it works through a few systematic process. However, the PPA is a commercial contract between the power seller and buyer. According to the agreement, the provider company installs and maintains the energy system on the buyer’s property. Thus, they ensure a constant power supply. In exchange, the buyer pays fixed bills for each kilowatt of electricity. Here, the buyer buys the partial or complete portion of energy produced from systems like solar photovoltaic, wind projects, microturbines, etc. This financial model gives the buyers affordable access to the energy.
On the other hand, the sellers get incentives and other tax benefits. The agreement’s terms entail the sellers’ ownership, the amount of power production and supply, fixed bills and escalation rate, penalties on non-compliances, etc. So, you can take advantage of green electricity and net metering without the responsibilities of ownership.
What is short-term PPA?
A short-term PPA is a short contract between a renewable energy producer and a customer. The agreement usually last for 1-2 years. These flexible PPAs help parties manage risks in a fluctuating electricity market. Here are the key benefits of a short-term PPA:
- This PPA can maintain the flow with market flexibility. The buyer and seller parties can negotiate or switch to better deals quickly during price fluctuation. Thus, it can act like a hedging tool to manage market price spikes during volatile times.
- Short-term PPA ensures better revenue management. The producers do not have to worry about a potential unfavourable rate. Instead, they can secure higher market prices during high market periods.
- A short-term PPA also reduces the buyer’s investment risk. Buyers can avoid overpayment during electricity price drops. It is perfect for buyers with falling capture rates.
What Is a Long-Term Power Purchase Agreement?
This is a decade-long power agreement lasting for 10-25 years. Usually, the large-scale producer and customers sign this agreement. This offers a fixed term of energy supply to ensure the growth and stability of a clean energy supply. Here are the benefits of a long-term PP agreement:
- A long-term PPA can provide stable revenue to enhance the producer’s bankability. It helps the provider company to get loans and funds to increase production. In this case, a favorable market and regulatory environment is necessary.
- The predictable bill helps the buyers do better financial planning in the long run. Some PPAs also include price adjustments for inflation. As a result, the buyers can control the cost and be less vulnerable to energy market risks.
- Long-term PPAs also encourage developers to enhance their projects with guaranteed income. They can increase green energy production to reduce their carbon footprint rapidly.
How to Get a Power Purchase Agreement in The USA (Step-By-Step Procedure)?
The process of getting a good PPA in the USA is the same regardless of their type. Here are seven easy steps to get your desired PPA.
1. Analyse Requirements
A good PPA experience depends on hiring a good company. But which company and agreement you will need will depend on your requirements. You should match your energy needs with your budget and regulatory environment. First, observe the recent electricity consumption of your project. Then, review your credit profile for long-term payment obligations. Finally, verify the interconnection rules, net metering policies, and local permitting requirements. Now you can create a request for quotation according to the requirements.
2. Send The Tender
Now it’s time to send the tender to your expected list of sellers. Ensure your Request for Proposal/Request for Quotation has the following requirements to get the best provider. It will also help to reduce negotiation complexities. Include,
- Technical specifications like technology preferences, system size and your location
- Contract lengths, pricing structures and escalation clause
- Evaluation criteria like price, developers’ experience, and performance guarantees.
3. Create A Shortlist
Now compile the quotes of your providers. Compare them based on contract lengths, track record, contract flexibility, performance guarantee, technology, additional services, etc. Do not forget to compare their financial stability. Now, narrow the list down to 4-5 top reliable companies aligning with your needs.
4. Ask for Additional Info
PPA is not like eating cake. There are so many information gaps to fill. So, ask for additional information to clarify any ambiguity. This can include detailed project timelines, risk allocation, and references from past clients. Additionally, ask for proof of successful interconnection agreements, how they handle operational issues, and a breakdown of all costs. Also, consider interviewing the shortlisted companies to validate their offerings. Then, pick the best provider for you.
5. Negotiate The PPA Contract
Now it’s time to negotiate in detail with your provider company to settle terms. It should clearly bargain the price per kilowatt, fixed or indexed escalator, contract period, termination clauses, and performance penalties. Also, try to include terms like as renewal options, buyout provisions, and REC ownership. Ensure that the contract covers maintenance responsibilities, system monitoring, and liability for underperformance. Finally, get a legal professional and energy professional to review the draft. It will ensure your interests are protected for long-term savings and risk reduction.
6. Finalize the Contract and Accounting
Cross-checking the legal, accounting, and financial structures is a must before signing. So, thoroughly analyze the final PPA draft with legal advice. Check that all agreed-upon conditions are correct and that no negative clauses remain. Also, pay specific attention to force majeure clauses, default remedies, and insurance obligations. Then, check technical requirements like equipment quality standards to ensure that the document conforms to local regulations. Finally, adhere to ASC 842 lease requirements for financial reporting.
7. Seal The Deal
Once all terms have been established and approved, execute the PPA with the authorized provider’s signature. After signing, maintain regular communication with the provider to assess performance and handle any operational difficulties. Finally, schedule the installation and connecting.
10 Negotiation Considerations Before Signing a Power Purchase Agreement
Before signing into the power purchase agreement, you must know about the project details, agreement details, and so on. However, let’s see some essential factors that you must focus on before signing into the PPA agreement.
1. Price Indexation
Market index is the most common parameter of PPA price settlement. Sometimes the influence of inflation also has an effect on the price. You should be conscious and have a clear idea about how this market index trends during the PPA duration. If you are opting for off-site PPA, you must remember that the lowest sticker price does not always mean the lowest cost.
The financial implications will vary depending on the market and your project scenarios. Based on them, you will need to decide whether prices will be indexed fully or partially. Also, decide whether caps or floors will apply to protect both parties from volatility.
2. Generating Technology
There are mainly two types of generating technologies used in a PPA. They are:
Dispatch Able Technology
This category includes most hydroelectric facilities, batteries, fuel cells, thermal generators, etc. They can modify their output according to need. If your PPA has a dispatchable resource, clarify the amount of energy you need during the settlement. Also, write about the conditions based on which the energy must be delivered.
Non-Dispatch Able Technology
Non-dispatch able resources like solar and wind generate electricity only when naturally available. In their case, you must clearly define the portion of the output you want to buy. Also, be very particular about the applicable settlement period.
3. Energy Curtailment
Ensure a performance guarantee to safeguard you in case the project fails to meet its promised output. Equipment degrades over time, especially in long-term PPAs. Also, incentives to keep equipment in excellent operating order are not necessarily matched. Finally, understand how plant curtailment, whether physical or financial, affects performance. Review and stress performance assurances on a regular basis throughout the PPA.
4. Ownership of Wholesale Market Revenue
You must specify the ownership of each revenue stream in your project documentation. It can include revenue from energy production, capacity, environmental credits, auxiliary services, and utility-based incentives. It will help to prevent misunderstandings and guarantee openness. If not specified, the seller will keep all types of rights. Lastly, be particular about which party is eligible for capacity payments and any wholesale market earnings in case of behind-the-meter installations.
5. Calculation of Peak Charges
Most of the time, you can get both volumetric and demand-based avoided costs or income benefits. It will help you minimize utility and electricity transmission demand rates. However, the net savings depend on how you calculate them. PPA’s definition of peak hours should match the utility’s or market’s demand charge criteria. This will maximize benefits and ensure the credit is delivered when energy is most valuable.
As a result, the system will work in the customer’s best interests. So, carefully consider both the volumetric and demand components of your current energy expenses when assessing a PPA. Lastly, consider the PPA’s utility’s definitions of holidays and working days. Here, any kind of mismatch can create confusion or unexpected peak rates.
6. Metering
Negotiate on the location, type, and accuracy standards of meters that will measure power generation and consumption. Also, determine who installs, maintains, and has access to metering data. OPT for installing interval meters to verify a project’s output. You can also consider a third-party bill auditing on an annual basis, and when rates change. Finally, ask the following questions.
- How will the parties measure the generation?
- Who is in charge of maintaining this data?
- Is the onsite project metered to track grid imports and exports?
7. Commercial Operation Date (COD)
Almost all PPAs have a commercial operation deadline. It specifies contingencies and grace periods. Also, the PPA price might go up each year on the COD anniversary. The COD also offers a yearly chance to assess if the generator’s output is adequate to meet the minimum volume required each year. So, set a clear COD to mark the start of energy delivery obligations. Include penalties or conditions if the project fails to reach COD on time and provisions for extensions.
8. Utility Tariff Rates and Changes
Behind-the-meter PPAs usually base their pricing on utility tariff prices. However, tariff specifics change regularly. So, you must understand how the PPA will adapt to such changes to ensure the buyer’s protection. Ponder over these questions.
- Does the PPA rate compare to components of the utility rate or the overall rate?
- Is the PPA rate adjusted with each utility rate change or on a monthly, quarterly, or annual basis?
- Or are PPA costs fixed according to current tariffs?
After this, establish how utility tariffs will be treated, especially if they change over time. It will also include grid connection charges and feed-in tariffs. Finally, specify the risk of rate fluctuations and handling responsibilities.
9. Construction Costs
You must outline the construction cost, like preparation, interconnection, and utility installations. Typically, the project developer covers these costs. However, if they expect you to contribute, this must be specified in the agreement. The PPA should also state who is responsible for utility payments during the agreement.
It will include all like the installation phase, prior to the Commercial Operation Date (COD) and throughout the operational life. It should also cover services like water, sewer, electricity, telephone, and internet. Additionally, the agreement should address how cost overruns or construction delays will be managed. Also, risk allocation between the parties must be very clear.
10. Operational Baseline Fluctuation
You should always verify if the PPA specifies providing you pre notice before making any operational changes. Some agreements can also restrict changes to equipment or property. For example, installing solar panels or increasing energy efficiency. Be aware of the ambiguous terminology that leads to violations. Payments under behind-the-meter PPAs may be based on the facility’s energy usage. You need to understand how this baseline is established. The project’s profits can be reduced if the baseline is fixed.
Conclusion
Now you know the simplest way of getting your PPA in the USA from reliable providers. A PPA in the USA can be a golden chance to ensure a more sustainable future and a stable economy. Our step-by-step guides, negotiation tactics, and other information above will help you get the best PPA.
So, carry out each step of this process with detailed attention. Start by analyzing your needs and evaluating competitive bids. Then, negotiate balanced risk allocation. Finally, complete contract conditions under a professional legal advisor.
Who controls PPA in the USA?
In the U.S., third-party developers usually manage PPAs. They handle everything. It includes securing investors, installing, operating, maintaining the energy system, and billing customers. State and local governments can also handle PPAs. This depends on state laws and utility regulations. You will need new legislation or rulings in states where PPAs aren’t yet allowed.
What Is Take or Pay in PPA?
A take-or-pay clause in a PPA requires the buyer to either use or pay for the electricity produced. It is so even if they do not need it. This guarantees that the power producer will receive a certain amount as long as the electricity is available. It helps the producer meet fixed costs. Thus, it offers investors’ confidence that the project will create consistent income.
Can You Buy Out a Power Purchase Agreement?
Most PPA agreements include buyout provisions. It allows you to exit the contract before it expires. Buyout clauses vary greatly. Also, they are unavailable before Year 7 of the contract.
Can You Get Out of A PPA?
Most provider companies will not let you leave your contract before it expires. It is applicable even if you sell your home. So, if you want to get out of it or sell your home before the contract expires, you must transfer your PPA to the new buyer. You can also buy out the system.
How Much Does a Solar PPA Cost?
A Solar PPA often does not need an upfront charge for the system itself. You pay only for the solar panels’ power, typically at a fixed or increasing rate per kilowatt-hour (kWh). The average solar PPA price is around $56.76 monthly.
What If My State Doesn’t Allow PPAs?
If your state does not allow PPAs, you can contact your state government to advocate for other solar energy sources. You can send a letter to your state energy office or organization. Here, explain why PPA is very effective in getting renewable energy. In some states, leasing solar panels may be preferable to PPAs. If neither option is accessible, look into community solar. It can help you subscribe to an off-site solar farm or start saving for solar panels.