Dependency of human civilizations on sources of ‘energy’ is not a new phenomenon. The ever increasing energy intensity across the globe and problems faced by developing countries due to carbon emission from its power generation is all well within our knowledge. While India continues to depend heavily on the traditional thermal power plants, which operate with energy produced by a steam boiler fueled by coal, the country is rapidly shifting its focus towards renewable energy by creating the required infrastructure for renewable energy.
Over the years India has invested heavily on the renewable sources of energy such as solar power, wind energy, hydropower energy, biomass, geothermal, etc. and resultantly we can see integration of a growing number of renewable energy sources and support for promotion of renewable energy consumption as well as for production. Subsidy on the solar power plants to generation-based incentive scheme for wind power production, the Government of India is taking all the policy decisions to make India sustainable and to establish India as a global leader in renewable energy.
The developments in renewable energy have given India the capacity to adapt to rapid growth while meeting its intense energy needs. Majority of large industries have initiated the process to procure renewable power, attain energy efficiency and reducing emissions therefore the corporate renewable Power Purchase Agreements (PPAs) are becoming a must for the corporate buyers.
Power Purchase Agreement is a long term contract between a power buyer and a producer of the power (i.e., renewable power project) to purchase electricity at a pre-agreed rate for a pre-agreed duration.
Since, planning and materializing renewable energy plants and then harvesting energy from them involves huge costs, thus, PPA is other alternative to procure energy. PPA is a contract which defines the terms of the electricity sale, the length of the contract, the point of delivery (physical or otherwise), to mode, manner, time, duration, volume, price, etc. in the form of a bilateral agreement, which provides a shield of protection to large consumers by reducing the exposure to the market price risks.
It is important to note that though the supply and demand of renewable energy is on rise in India but there also exists various operational as well as policy challenges mainly due to renewable energy sector in India is innovative and yet to be tested.
The use of solar power and wind energy technologies to generate power is seeing a rapid rise in India, mostly due to availability and cost effectiveness. Further, due to geographic condition, the solar power can easily be utilized in most of the areas in India. With the active promotion and support of the governments, the overall cost of the power generation, especially, from the solar plants is constantly reducing. Investing directly on a power generation project, though, comes with tax benefits besides attracting certain waivers on the Open Access Charges, but owing a power generation plant requires a lot of diversion from the focus on doing the core business. Therefore, while strategizing the power purchase policy, purchasing power from a third-party’s power project through a PPA is viable option.
The common options for renewable procurement in India commonly are a) from a roof-top solar project, b) from a utility scale power project and c) from a utility scale renewable power project structured as a captive project. Though there exists various commutations and permutations, which overlap one another in some or the other way, the focus which remains common in all is securing a fixed quantity of the energy through PPA. Thus, the types of PPAs commonly used in the corporate environment in India, can be covered under the following two categories:
- Physical PPA: A Physical Power Purchase Agreement is a contract with the renewable power generation project to schedule the delivery of the renewable energy to the renewable energy buyer directly from the renewable power generation project. Other considerations such as fixed price and tenure, etc. are also agreed. Physical PPAs operates under following three main business models:
- On-site module: In this module, the renewable power generation project makes the physical supply of renewable energy directly to renewable energy buyer on agreed terms under the PPA. This module is useful when either the renewable power generation project is in the close proximity from the metering point of the renewable energy buyer or is at the very location of the metering point.
- Off-site module: in this module, the supply of the renewable energy is not made directly to the renewable energy buyer by the renewable power generation project but rather is made through the public grid. This module is useful when the renewable power generation project is not in the close proximity of the metering point of the renewable energy buyer. This module enables the renewable power generation project to select the best suited location or locations with optimal conditions or a plant that already exists for generation of the renewable energy and also the flexibility to serve multiple buyers of the renewable energy.
- Sleeved module: In a this module, a renewable energy service provider acts as an intermediary utility company and handles the transfer of money and energy to and from a renewable power generation project on behalf of the buyer of the renewable energy. The renewable energy service provider (utility company) takes the renewable energy directly from the renewable power generation project and “sleeves” it to the buyer of the renewable energy at its metering point, for a fee.
- Virtual or Synthetic PPA: the Virtual Power Purchase Agreement (VPPA) – also known as Synthetic Power Purchase Agreement (SPPA) – replicates the financial contract that is associated with a physical PPA but doesn’t involve the delivery of renewable energy. Under this arrangement the renewable energy is purchased at a fixed price, in isolation to the floating market price of the renewable power generation project. Which means a) if the fixed VPPA price is greater than the actual market price, the project will pay the difference to the renewable energy buyer and b) if the market price is greater than the VPPA price, then the renewable power project will keep will the difference. Another interesting aspect of VPPA/SPPA is that under these contractual arrangements the buyer typically receives the project’s Renewable Attributes but does not take physical delivery of the energy and continues to purchase its electricity through their local utility. In other words, the renewable energy is not supplied directly to the power purchaser from the renewable power project’s energy generation plant but is supplied to its usual energy supplier – such as electricity board – which procures precisely the quantity purchase whereof is agreed by the contracting party under PPA. This enables large electricity consumers with fragmented/distributed electric loads to realize the benefits of renewable energy.
It is difficult to make a choice for which PPA to choose as it can be hard to see the benefits and drawbacks of each option. However, when we compare the difference between a Physical and a Virtual PPA, we see that the two options are almost similar as the cost savings, additionality and the market of both types is largely the same. However, the difference between the two is deeply rooted and hidden in the finer details such as the Power Grid and the storage capacities, the finance and accounting mechanism.