An introduction to PPA market in India.

 

Introduction

 A PPA is a legal long-term contract between a buyer and a seller of electricity where the buyer is mainly a state-owned distribution company and the seller is a privately owned electricity-producing plant. The producer is the one who pays for the sizing, design, installation, and infrastructure facilities and gets the cash from selling the produced electricity to the electricity distribution companies.  

Benefits

• Ø  Reduces the electricity price risk for the operators and financiers of the power plant as the agreement provides for the mandatory fee payment by the off-takers.
• Ø  The agreement protects from competition from the producer of electricity who may be challenged by another local producer who can offer electricity at much cheaper rates.
• Ø  It envisages a projected revenue from the PPA project by determining the quantity of electricity to be bought and the price to be paid in advance at the time of entering the contract.
• Ø  The contract usually offers tax incentives or subsidies or some other form of concessions to the producers to incentivize a continuous supply of electricity.

Ø   Also, PPA defines that the price to be paid by discoms should rise at a predefined rate which is different from the current local market rate. Hence the customers are saved from exorbitant electricity charges which may arise due to the vagaries of the economic forces.

Pricing Mechanism of PPAs

The pricing mechanism is one of the basics for allocating the revenue and the market risk between the private producers and the public off-takers. The pricing of PPA consist of two components:

• a.      Fixed cost or the capacity charge, this is the charge paid by the off-taker for making the generation resources available to the plant producer.
• b.      An output charge is the variable cost that depends upon the volume of the electricity delivered.

Since the fulfillment of the above pricing mechanism is completely dependent on the private producer’s ability to meet all the requirements under the PPA, the financiers would require the PPA to be for a longer tenure to guarantee investment recovery.

Contribution of PPAs to the Renewable Sector

Another area where PPA is being used extensively in the renewable energy sector. According to Bloomberg India with a capacity of 1.6 GW of corporate renewable PPAs was the largest market for PPAs after the US in 2018.

The above graph compares the global corporate PPA market with the Indian market which shows the growth of PPAs in India accelerated in recent years.

The following graph shows how much the corporate PPAs are being used by various business firms to become ESG complaints to gain more investors’ appeal and also due to the cost savings due to the lower renewable energy cost. Together the top five segments have procured more than 227 MW of renewable power through the PPAs.

 

 

Now the structure of a power purchase agreement is of two types

•         I.            Third-party agreements are usually called a Solar Power Purchase Agreement (SPPA) where a developer installs and maintains the system on a consumer’s property and the consumer purchases the electricity at price lower than local rates for a pre-determined period.
•       II.            Open access model or group captive model is the one where the project being developed has a 26% equity ownership by the corporate buyers and these buyers together need to consume 51% of the power output from such projects. In this model the cross-subsidy and additional surcharges are not levied on the power procured also the capital investment required is minimal.

The following graph shows the landed cost under the open-access model and the third-party model of PPAs for different Indian states.

 

Disadvantages

• v  Firstly, the sanctity of PPA projects must be respected and not merely just tempered with even laudable intentions. For instance, as a measure in response to discoms not maintaining a letter of credit as per PPA contracts the ministry of power gave direction to load dispatch centers to sell power to a third party in case of default. The recent act by the Punjab government of proposing the Power Tariff Bill 2021 to amend the five-year-old PPAs is going to adversely affect 1000 MW of electricity owned by independent power producers. Such interference in the PPA market will surely erode their efficiency.
• v  Secondly, Since the contract entails the conditions related to the viability of the producer, sanctions to be imposed at the time of the violation, the units to be purchased, etc. which all work in the long-term hence reducing the flexibility of both the parties to this contract. Since at times when the producer isn’t able to produce the required amount of electricity due to unforeseen circumstances it creates a problem for the off-taker as it immediately has to search for another alternative to make up for the missing electricity demand. So, the government is redrafting the PPA models to move away from long-term contracts as the power procurement costs can be brought down through a mix of contracts with different tenures.
• v  The PPAs provision sometimes provide for annual banking of power so that consumers can use power in peak season generated in non-peak seasons. But this process will increase the tariff charged by developers as they aren’t able to sell all of the energy output produced at the moment. Extra charges called the banking charges are levied on a normal tariff which is around 10% of banked energy in Rajasthan and 12% in Uttar Pradesh. As the extra electricity is banked with the discoms, the developers need to pay these discoms more payment hence higher tariff prices.

Conclusion

It's evident that PPAs do face some challenges but still, they can play an important role in the penetration of renewable resources in the Indian energy sector. As the usage of thermal power plants generates pollution and is costly to maintain. For example, coal caters to around 75% of thermal power plants’ demand, and India in March 2022 paid 1.58 trillion rupees on importing 247 million tonnes of coal out of which 197 million were thermal grade coal.

Also, the government is taking various initiatives to promote the PPA market, one of them being the Green Term Ahead Market (GTAM) which would allow the trading of renewable energy through a power exchange named Indian Energy Exchange without the violation of PPAs. The measure by the Haryana government to allow DISCOMS to meet their Renewable Purchase Obligation by leveraging corporate renewable PPAs

The Blomberg New Energy Finance (BNEF) stated that India was the second largest growth market for corporate renewable PPAs after the US in 2019, with a 1.4GW of additional capacity. Hence, the structure of PPAs must be properly managed and executed by the Indian Government through more efficient and effective policies, to promote renewable energy through the use of Power Purchase Agreements.