Power Purchase Agreements (PPA): Meaning, Taxation, Benefits, etc.

Long-term energy commitment between two parties sometimes needs a contractual deal to solidify the business. The “deal” that the two parties make is a Power Purchase Agreement. 

This PPA meaning includes the generator, often represented by a renewable energy project developer, committing to selling electricity to the consumer, normally a business, government entity, or software, at a predetermined price over a specified period.

This “PPA full form” agreement outlines the terms and situations governing the electricity supply, covering aspects such as pricing, duration, delivery schedule, and other relevant provisions. 

These agreements are generally categorised into two types: physical and digital. With their help, project developers can demonstrate revenue stability, a vital component for attracting investments. They can also offer energy buyers various incentives, which include cost savings and avenues for meeting sustainability and emission targets. 

Importance of Power Purchase Agreements in the Renewable Energy Sector 

For the supply player, PPA provides revenue stability and offloads some of the risks otherwise inherent within these projects, this changes the risk profile of their financial viability and opens the door to debt and low-cost capital. 

When it comes to the demand side, power purchase agreements enable energy buyers to receive electricity from renewable sources, contributing to their sustainability goals, and reducing reliance on fossil fuels. Simultaneously, they make costs more predictable by reducing exposure to energy market volatility, and more often than not provide a saving over available spot market rates. 

With such benefits on both sides of the equation, it is unsurprising to see they have proved very popular in recent years.

How a PPA Works

A Power Purchase Agreement involves key elements facilitating a mutually beneficial arrangement between energy producers and buyers.

1. Project Development: Renewable energy project developers plan and operate facilities like solar or wind farms to generate electricity.
2. Agreement Negotiation: Energy producers and buyers negotiate terms, covering pricing, contract duration, supplied electricity quantity, and specific requirements.
3. Electricity Generation: Renewable energy projects utilise natural resources to generate electricity from installed capacity.
4. Electricity Supply: Producers deliver generated electricity to buyers physically or virtually, based on the PPA agreement type.
5. Payment and Settlement: Buyers pay the agreed-upon price for received electricity per PPA terms, either periodically or through agreed-upon mechanisms.

 Once you know the workings of the power purchase agreements it is time to choose them. However, there are quite a few types of PPAs in the renewable energy sector. You need to choose one that aligns with your investment goals. So, let’s take a look at the types of PPA.

Types of PPA

There are three varieties of PPAs. One thing in common among all three is the fixed quantity of electricity that each of them sells and supplies. The DIFFERENCE lies in how they supply the electricity. 

1. On-site PPA

An on-site Power Purchase Agreement (PPA) entails a direct physical supply of electricity, with the generation plant situated behind the consumer’s metre. Often located at the same site, on-site PPAs cater to a consumer’s consumption profile and involve the grid operator if excess electricity is supplied. 

As it directly reduces a company’s consumption, on-site PPAs are inherently corporate PPAs. For instance, an industrial company might opt for an on-site PPA to reduce electricity procurement costs without handling the installation of a photovoltaic system.

2. Off-site PPAs

In contrast, off-site PPAs don’t involve a direct physical supply between the plant and consumer but rather an agreement to purchase a defined quantity of electricity. Electricity is delivered through the public grid, allowing flexibility in plant location selection. 

Off-site PPAs offer long-term price security, with participants negotiating the electricity supply terms while accounting for applicable charges and grid fees to be paid to the grid operator.

3. Sleeved PPA

A sleeved PPA is essentially an off-site PPA where an energy service provider acts as an intermediary, managing processes like balancing groups, aggregating producers, supplying residual electricity, marketing green certificates, and assuming various risks. This arrangement enhances flexibility and risk management for both producers and consumers.

GST and Taxation of PPA

Power Purchase Agreements (PPAs) typically incorporate existing indirect taxes into the contract price. However, these agreements often include provisions allowing price adjustments for tax changes, termed as ‘Change in Law’ or ‘Force Majeure‘ clauses.

The introduction of Goods and Services Tax (GST) is generally treated as a ‘Change in Law’ or ‘Force Majeure’ event in most PPAs. Yet, for contracts lacking provisions for tax adjustments, GST implementation may lead to increased contract prices. 

Ambiguity arises when GST is enforced post pre-bidding but before PPA signing, raising questions on whether this tax legislation change qualifies as a ‘Change in Law.’

Keeping in mind all the types of types of PPA and how it works, let’s have a look at the advantages of these agreements. 

PPA Advantages 

1. Zero Upfront Costs

Choosing solar Power Purchase Agreements (PPAs) means you don’t have to pay a hefty upfront amount. Install a solar panel system with little to no initial cost, enjoying the benefits of a positive Return on Investment (ROI).

2. Transparent Power Costs

Solar PPAs offer clarity on your power expenses. As you sign up for these energy-saving agreements, you are pledging to reduce energy bills. The PPA outlines your per-wattage power costs, providing a clear understanding of your exact payments and shielding you from fluctuating power costs.

3. Minimal System Risk

If your solar energy system encounters issues, repairs or replacements are the owner’s responsibility. This minimizes your risk, making solar PPAs an attractive option for novice investors. While exploring other financing options is a smart strategy, the PPA remains advantageous for portfolio diversification.

4. Consider Potential Drawbacks

Despite its benefits, it’s essential to be aware of potential drawbacks before signing a power purchase agreement. Understand the disadvantages to make informed decisions, ensuring you are fully prepared for any long-term investment commitment. 

5. Energy Prices Fluctuate

Power Purchase Agreements face challenges due to the dynamic energy market and their long duration (15-25 years). A significant concern is the potential for energy prices to fall below the agreed-upon rate, resulting in financial losses and a competitive disadvantage. To address this, periodic reassessments between buyers and sellers are crucial for risk mitigation.

6. Forecasting Consumption

Forecasting consumption requirements poses another limitation, as market factors influencing power needs can lead to unreliable predictions. Negotiating tools like flexible delivery or flat contracting can help mitigate the uncertainty in consumption forecasting.

7. Non-Compliance

Non-compliance is a common risk in PPAs, given the involvement of two parties. To handle this, agreements should include provisions for addressing non-compliance issues promptly, ensuring a swift resolution and minimising disruptions.

Opting for a PPA in the renewable energy sector offers a cost-effective way to access clean energy without upfront expenses. It provides financial predictability, shields against system risks, and supports sustainability goals, making it an attractive choice for individuals and businesses alike. 

FAQs: Power Purchase Agreements (PPA): Meaning, Taxation, Benefits, etc.  

Is solar energy exempted from TDS in India?

Transactions in electricity, renewable energy certificates and energy-saving certificates traded through power exchanges are exempt from TDS provisions.

Are solar PPAs a good deal?

Yes, sun Power Purchase Agreements (PPAs) are advantageous. They provide value-effective access to clean energy, with zero in advance charges, transparent pricing, and risk mitigation, making them a favourable choice.

How does a PPA contribute to sustainability goals?

PPAs source electricity from renewable energy projects. This reduces carbon emissions, aligning with environmental sustainability objectives.

What is the GST on solar power generation?

The GST on sun power generation is now 12%. Earlier these projects had 5& GST. The increase is 7%. 

Conclusion

Choosing a power purchase agreement (PPA) in the renewable energy sector is a smart move, offering clean energy access without upfront costs. It ensures financial stability, minimises system risks, and supports sustainability goals. For a seamless renewable energy investment experience, explore SustVest, the trusted renewable energy investment platform.