Ask anyone who is looking at putting up a MW-scale solar power plant as to what the most important part of a solar power plant is, and he will tell you that it is that of getting the PPA.
So, what indeed is a PPA and why is it such an important aspect of solar power plants?
What is a PPA?
Power Purchase Agreement is a legal contract between an electricity generator and a power purchaser. In India, Central and State utility PPA contractual terms last for 25 years, whereas nascent Private PPAs are around 5-10 years . It is during this time the power purchaser buys energy.
Solar Developers are able to competitively price solar power for both public as well as private customers under the terms of the PPA.
PPAs usually include terms of agreement i.e. details on interfacing and evacuation facilities, operation and maintenance, metering arrangements, scheduling of solar power, rate of energy including escalation rates, dispute settlement, billing and payment.
Pros of PPAs include:
- No/low up-front cost.
- A predictable cost of electricity over 15–25 years.
- No need to deal with complex system design and permitting process.
- No operating and maintenance responsibilities.
- Customer enjoys marketing benefits of their green energy
- Price of electricity is indexed to inflation and therefore is increasingly cost effective as fossil fuel based electricity gets increasingly expensive.
Importance of the PPA
Well, unless you are putting up a captive solar power plant for which the consumer of the entire power generated will be yourself/your company, a PPA is a must-have for you to invest in a solar power plant.
Imagine you are starting a business but you have no idea who your customer or you do not have a plan of how to sell your product. Under such circumstances, how will your business make money? It cannot!
Similarly, the ppA is the contract that essentially gets you a customer for your solar power plant. As solar power plants are long term investments, you cannot put up a power plant and then search for a customer. What happens if you are not able to get one? Such a huge investment goes for a waste. It is hence imperative that you first identify a customer who agrees to offtake the power generated by your solar power plant for a specified number of years (preferably 10+ years), and then, once you are sure that you would be able to get your money back within the ppA period, invest in the power plant.
Procedure to Get a PPA
So, now we know that the PPA is the most important pre-requisite for a MW-scale power plant. What are the steps for you get such as PPA?
- Identify potential locations
Identify approximate area available for PV installation including any potential shading. The areas may be either on rooftops or on the ground. A general guideline for solar installations is 5–10 watts (W) per square foot of usable rooftop or other space.
- Identify potential solar policies applicable for the land
State policies differ from region to region. The tariff rates at which PPAs are signed differ region to region. Hence zero in on a policy that can bag you a PPA that ensures profitable returns.
- Respond to the Request for Proposal (RfP) or win bids issued by the Power Purchaser
The developer may have to respond to RfPs or win bids issued by the Third Party Power Purchaser or the Utility
- Contract Development
After a winning bid is selected, the contracts must be negotiated—this is a time-sensitive process. In addition to the PPA between the government agency and the system owner, there will be a lease or easement specifying terms for access to the property (both for construction and maintenance). REC(Renewable Energy Certificate) sales may be included in the PPA or as an annex to it.
- Permitting and Rebate Processing
The system owner (developer) will usually be responsible for filing permits and rebates in a timely manner. However, the government agency should note filing deadlines for state-level incentives because there may be limited windows or auction processes.
- Project Implementation and Commissioning
The developer should complete a detailed design based on the term sheet and more precise measurements; it will then procure, install, and commission the solar PV equipment. The commissioning step certifies interconnection with the utility and permits system startup. Once again, this needs to be done within the timing determined by the state incentives. Failure to meet the deadlines may result in forfeiture of benefits, which will likely change the electricity price to the government agency in the contract. The PPAs usually establish realistic developer responsibilities along with a process for determining monetary damages for failure to perform.
Challenges associated with Government/Utility PPAs
- Tariffs may be overturned by SERC
- Poor financial health of DISCOM might lead to delay in payments to developer
- Generally speaking, government PPAs are regarded as low(er) risk as they are backed by the government and are usually signed for the duration of plant life (25 years)
Challenges associated with 3rd Party PPAs
- 3rd Party’s financial health may be better than DISCOM’s, but long-term business prospects need to be evaluated
- Credit rating of the 3rd party should be considered as they are not backed by a government
- PPAs need not be signed for 25 years. Some are signed for as short as 3 years, leaving future revenue generation of the plant in doubt
In India, both central and state governments have come up with solar allotments for which PPAs are being issues. Some examples of state and central government PPAs are provided below.
Examples of Projects executed under Government PPAs
Karnataka’s solar policy was released in 2014, operative till 2021, and targets 1,600 MW of ground mounted plants.
For Grid Feeding Plants
This includes 2 categories
- 300 MW of 1-3 MW capacity plants for land-owning farmers
- The rest through competitive bidding for plants greater than 3 MW
An RfP was released in June 2014 for 500 MW under the 2ndcategory.
- 8 out of 30 bidders won the allocation for 500 MW
- Lowest winningbid was Rs. 6.71/kWh (20 MW) and highest was Rs. 7.12/kWh (10 MW)
- 380 MW went to just 3 bidders
- There is no tariff distinction between AD/Non AD
- 25-year PPA
|Year||AD/Non AD||Lowest Tariff||Highest Tariff||Escalation (%)|
No notifications have been issued till date for further capacity addition.
For Sale to 3rd Parties/Captive Consumption
The following incentives were granted under the policy until 2021
- Tax concessions – For entry tax, stamp duty, and registration charges as per industrial policy
- Contract demand – Industrial consumers buying solar power will be allowed pro-rata deduction in contract demand
- Wheeling, Banking, Cross Subsidy charges – Fully exempt for 10 years from commissioning of plant, for plants commissioned between 01.04.2013 and 31.03.2018
- This exemption does not apply to captive plants availing RECs