Advantages and disadvantages of Power Purchase Agreements

Explore the advantages and disadvantages of Power Purchase Agreements (PPAs). From cost-saving benefits and reduced risk to complex contracts and potential penalties, this article provides a comprehensive look at the pros and cons of PPAs for organizations such as nonprofits, municipalities, and large commercial industries.

Advantages of Power Purchase Agreements

  • Projects are financed on equity of properties, such as unused grounds or building rooftops, that otherwise have no value.
  • Owners are not burdened with intensive project costa.
  • Power purchase agreements guarantee owners a hedge against electrical energy escalation costs.
  • There is significantly less risk of energy cost escalation associated with third party PPAs than with grid purchased electrical energy.
  • The owners assume no responsibility for maintenance and upkeep of the leased equipment or grounds for the duration of the lease period.
  • Upon completion of the lease agreement period, owners are offered flexible options for ownership.
  • All PPAs intrinsically constitute turnkey design build contracts, which somewhat relieve the owners of detailed technical design.

Disadvantages of Power Purchase Agreements

Since power purchase agreements essentially constitute a contract rather than an engineering design and procurement agreement, they inherently include a number of undesirable features, which in some instances could neutralize the benefits discussed previously.

  • PPA contracts are extremely complex and convoluted. Contract agreements drafted include legal language and clauses that strongly favor the third party provider.
  • PPA contracts incorporate stiff penalties for premature contract terminations.
  • PPA or third party ownerships in general involve a finance company, an intermediary such as a sales and marketing organization, a design engineering organization, a general contractor, and in some instances a maintenance contractor. Considering the fragmented responsibilities and the complexities embodying the collaborative effort of all entities and the life cycle of the contract, the owners must exercise extreme diligence in executing PPA contracts.
  • The owners have no control over the quality of design or materials provided; therefore, extra measures of caution should be exercised when evaluating final ownership of the equipment.
  • In general, owners who elect to enter into a power purchase agreement, such as nonprofit organizations, municipalities, city governments, or large commercial industries, seldom have experienced engineering or legal staff who have had previous exposure to PPA type contracts.
  • The owners tie up the leased grounds or buildings for extended periods and assume responsibility for insuring the property against vandalism and damage due to natural causes.
  • In the event of power outages, third party ownership agreement contracts penalize the owners for loss of power output generation.
  • PPA contracts include yearly energy escalation costs, which represent a certain percentage of the installed cost and must be evaluated with extreme diligence and awareness, as these seemingly small inflationary costs could neutralize the main benefit, which is the hedge against energy cost escalation.
  • PPAs for large renewable solar power cogeneration contracts are relatively new financial instruments. Therefore, their owners must be careful to take proper measures to prevent unexpected consequences.