Power Purchase Agreements
Electricity being an essential welfare commodity for economic development, from houses to hospitals, schools, businesses all operate with due assistance of electricity in some way or the other. However, with time there is shortage of supply and increase of demand for electricity. Government through its intervention and collaboration with private investors/ independent power generators to ensure to meet this capital need.
Power Purchasing Agreements are thus agreements between two parties where one party who produces or generates the electricity from renewable sources and the other party is ready to purchase the electricity. A power purchase agreement may include payment terms, termination, when electricity is to be delivered, penalties for undersupply (if any) and other matters related to commercial operation.
- Definitional Clause – Just like our statues we have specified terms and their definition given at the very inception, the definition clause is also used in an agreement at the beginning of the PPA. The definition clause is usually the first clause here as well which defines certain technical terms pertaining great importance in the agreement. An examples of definitional clauses are:
“Agreement” means this document, including its supplements and all documents, guidelines or standards incorporated by reference, as such may be amended from time to time.”
- Term of Agreement – is another important factor to be included in the PPA. PPA contains all the essential, commercial terms, agreement date, early termination etc, which are to be presented in a commercial operation. The time period of the contract usually ranges from 20 to 25 years. This period is long because the installation cost of power plants, power grids and transmission lines incurs huge costs and that.
“Term of Agreement
This Agreement shall be valid for a term commencing from the Effective Date until the Expiry Date (“Term of Agreement”), unless terminated earlier pursuant to Article ____. Upon the occurrence of the Expiry Date, this Agreement shall, subject to Article ___, automatically terminate, unless mutually, extended by all the Parties on mutually agreed terms and conditions, at least ninety (90) days prior to the Expiry Date, subject to the approval of the Electricity Regulatory Commission”
- Conditions subsequent to be satisfied by the seller and the buyer. – These are conditions that both seller and consumer have to mutually agreed upon. The conditions are basically requirements that both the parties should fulfill, mostly within the twelve months from the agreement. The conditions and obligations are mostly related to permit approval and sending notice to the contractor. If these are not fulfilled then the other party should be obliged to pay compensation.
“Satisfaction of conditions subsequent by the Seller
The Seller agrees and undertakes to duly perform and complete the following activities at the Seller’s own cost and risk within ____ months from the Effective Date:
[List of activities]
Satisfaction of conditions subsequent by the Procurer
The Procurer agrees and undertakes to duly perform and complete the following activities at the Procurer’s own cost and risk within ____ months from the Effective Date:
[List of activities]”
- Supply of power – This clause pertains a very important question in the entire agreement which deals with the supply of power. This clause also defines whether the parties are going to enter on-site or off site- PPA or under this clause the producer supplies to the consumer, the agreed energy capacity. The delivery of the same is going to be in accordance with PPA or a virtual PPA.
- Charges for Available Capacity – The Company’s fixed cost and variable cost will be stated under this clause. The fee will be based on availability (availability fee) and power delivery fee.
- Metering – For such huge power production huge meters are necessary for maintaining the records as well as regulating the production. This clause handles all the matter related to meter installing, reading and measuring. The price of installing, regulating as well as all substantial expenses to be bear for the purpose of the meter.
- Insurance- This clause takes into account that both the parties should have adequate insurance for the term of the agreement. Evidence for the same is also required. On any kind of loss to the plant or any part of the plant, this insurance can help against that loss. The amount of insurance would be dependent upon the value of the plant.
- Force Majeure – This clause is important to prevent the termination of the project due to any unexpected situation such as war, terrorism or epidemics. The clause of force majeure means the non-completion of a task because of any unexpected event or circumstance. These clause recognizes such circumstances, the list includes incidents that are beyond the control of the parties and thus prevents the termination of the agreement because of them.
- Liability and Indemnity Clause – An indemnity clause in any kind of contract refers to the transfer of risk or cost which is to be paid by one party but if the clause is included then other party becomes liable for the same. In the indemnity clause the limitation of liability, procedure for claiming mine or monetary limitation of liability is defined in detail.
- Change in Law – Climate change, environment degradation are prime topics in the politics today. Legislations are made regarding the same and are constantly changed because it’s a new and overgrowing domain. Electricity provided by renewable energy sources will also be regulated by laws that are constantly changing. However, the PPA is a long term contract and is susceptible to various changes, including the changes in the actual legal regulation or framework on which the PPA stands. Since these contracts are usually long-term they might come across the incidents where the law can change after the bidding of PPA. And a change in law can also have material effects on the PPA, in terms of cost, income and expenses. To overcome this problem we have the change in law clause. If one party is being affected by the change in the law, it has to inform the other party as soon as possible, within a reasonable time limits. Added with notification of a change in law, the party should also give an account of change in laws in order to avoid future dispute.
In conclusion, signing a PPA is the best way to averse all types of risks legal involved, showing your commitment towards sustainability, and gets you ahead of the competition overall.
By Zoya Hossain