Business Model Power Purchase Agreement


A POWER Purchase Agreement is a legal contract between an electricity producer (supplier) and an electricity buyer (buyer, usually an electricity supplier or a large electricity buyer/distributor). Contractual terms can take between 5 and 20 years during which the buyer buys energy and sometimes also capacity and/or ancillary services from the electricity producer. These agreements play a key role in financing assets of own property producing electricity (i.e. not held by a utility company). The seller under the AAE is usually an independent electricity producer or a “PPI.” Solar AAEs can also be used as protection against future increases in electricity rates. It should be noted that the price per kilowatt hour is set in an AAE in a contract, while the electricity supply of conventional retailers is subject to unpredictable price increases. In a synthetic structure of AAEs, no power is physically exchanged. Instead, the agreement operates with a derivative contract structure, in which the buyer and generator agree on a defined “strike price” for electricity generated by a renewable energy facility. Each party will then enter into separate agreements with its electricity supplier/supplier for the sale/acquisition (if any) of electricity at the spot price. The agreement then functions as financial cover: if, during a billing period, the spot price exceeds the strike price set by the AAEs, the alternator pays the excess to the buyer for the electricity produced during that period; If the market price of electricity is lower than the strike price during a billing period, the purchaser pays the electricity producer the deficit of the electricity produced during that period.

To have a successful business model, three ingredients are very important: proven technology, market demand and financial sustainability. If one of them is absent, the business idea will probably fail. The Solar AAE model is an excellent example of how these three elements can be mixed by connecting key players in the energy industry. Electricity purchase contract (AAE) for small rural energy projects as part of a series of documents developed by international law firms for use in small rural energy projects. Documents prepared for the country in Southeast Asia. The above AAEs must be distinguished from electricity purchase contracts in a deregulated electricity market, which are generally contracts to purchase electricity from a private generator where the plant already exists or when the plant is built at the initiative of the private generator.