Understanding Power Purchase Agreement (PPA) for Solar Projects

Traditionally PPA was vehicle for purchase of electricity from power producers and distribution utilities. However, now days independent power producers as well as owner of solar power projects assigning PPA’s with non-utility buyers/ open access consumers who have also obligation to meet their solar portfolio. Typically a third party PPA model works in such a way that a project developer builds own and operates a solar plant and signs an agreement (PPA) for selling electricity to any consumers via a long term PPA. In this process, while the open access consumer’s gets a benefit of solar electricity available at a cheaper rate, it also meets its solar power obligation as mandated by the RPO’s. If a project developer do not want to sell its green electricity he can sign a PPA only for the sale of electricity ( grey electricity) and can sell environmental attributes/ green power ( REC’s) in the open market through exchange. This means that solar electricity can be bought by a consumer who want to meet its solar obligation as well as to a consumer who only want to buy electricity. While selling electricity from a solar power generator to any open access consumer located in the same state following charges apply:

Open Access at 33 kV	Gujarat	Maharashtra	Tamil Nadu	Andhra Pradesh	Rajasthan	Karnataka
Transmission losses (%)	7.00%	4.85%	5%	4.02%	4.40%	4.03%
Wheeling Losses (%)	7.00%	6%	7%	7.89%	3.80%	5.00%
Banking Charges (%)	12%	0	0	2%	2%	2%
Wheeling Charges (Rs/kWh)	0.13	0.04	0.14	0	0.11	0
Cross Subsidy Charges (Rs/kWh)	0	0.61	2.07	0	0.38	0.11
Electricity Duty (Rs/kWh)	0	15%	0%	0	0	0
Base Rate( assumed) (Rs/kWh)	5	5	5	5	5	5
Effective Rate (Rs/kWh)	6.43	6.3425	7.81	5.6955	6	5.6615
Open Access Charges	0.79 Rs/Kwh	0.84 Rs/Kwh	6483Rs/Kwh/Month	1592Rs/Mwh/Month	146.61Rs/Kwh/Month	1.56 Rs/Kwh

The above table shows that typically if an electricity generator signs PPA from Rs. 5 with an open access consumer, the net rate to the consumer ranges between Rs. 5.6-7.8 depending on the location of the state. Cross subsidy surcharges are the major factor in the state which impact the electricity sale to a third party while few states such as Gujarat do not have any cross subsidy surcharge for Solar on the other hand states such as Tamil Nadu charge over Rs.2 as cross subsidy surcharge. In order to avoid the cross subsidy surcharge many solar investors sign a PPA under group captive scheme. The group captive scheme requires at least 26% of equity share in the solar project by the consumer and has to consume a minimum of 51% electricity from the solar project. Many large consumers are now tying up PPA’s with solar generators to take benefit of group captive generation scheme. It is important that the buyers and sellers of electricity must be aware of the different state regulations and find out an appropriate way for the third party sale. In recent time, third party sale model has also been adopted by roof top owners where in the solar power developer installs a solar plant at the roof top of any building owner and signs a PPA for electricity sale through roof top solar. In case the electricity is consumed directly by the building as off- grid consumption, no REC benefits are available. 30% capital subsidy and accelerated depreciation can be availed.