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What Is a Power Purchase Agreement?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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    Conjecture Corporation
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Power purchase agreements (PPAs) are specialized contracts that establish working relationships between clients who wish to purchase power from an entity that produces that power and has a surplus to sell. A contract of this type may exist between two companies that service two different geographical territories, with one company purchasing the excess power production of the other as means of meeting customer needs. This type of arrangement is usually associated with the production of electricity by various means, including newer alternatives such as energy production with the use of solar panel grids and wind turbines. The exact terms will vary, depending on the nature of the power that is being purchased and any governmental regulations that apply to the establishment of the power purchase agreement.

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As with many types of business contracts, a power purchase agreement will include terms and provisions that define the reason for the contract and the rights and responsibilities of each party involved in the working relationship. Most will be structured with a specific start and end date, a schedule of fees and charges related to the amount of power purchased, and even details on how the power is delivered to the buyer. Provisions that cover late payments and other issues are also often part of the power purchase agreement, a measure that helps to further define the terms of the transactions covered by the contract. The contract will also often cover situations that may allow one or both parties to terminate the agreement early, as well as provisions that make it possible to roll the contract into a new period within a certain time frame before the expiration date.

While there are exceptions, the seller involved in the power purchase agreement is normally the owner and operator of the technology used to generate and deliver the power to the client. The seller in turn will have an established network that can be used to resell the supplied power to its customers. For example, when the power purchase agreement is between two regional electric companies, the buyer will connect with the network of the seller to arrange the power transfer, using technology that the buyer owns and operates. The seller in turn will pass that purchased electricity on to its subscribers through its own network of grids and facilities.

In some cases, a power purchase agreement may be established between a power supplier and a municipality. In this arrangement, the supplier agrees to sell power to the city or town at a fixed rate per unit. The city then bundles the utility with other services such as water and natural gas, providing a one stop shop for its citizens. In this scenario, the power company deals with a single client in the area instead of establishing individual residential accounts with everyone in the municipality. Typically, the city is able to negotiate a lower rate based on volume usage, and in turn is able to resell the power to its residents at a rate that is competitive but does allow the city to make a small profit.

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