A couple of weeks ago the University of New South Wales announced its entry in to a power purchase agreement (PPA) for the next 15 years with the goal of reaching carbon neutrality (http://www.smh.com.au/business/the-economy/unsw-signs-deal-to-go-fully-solar-powered-20180111-p4yyf3.html).
In today’s article we ask three questions: What is a PPA, why enter into one, and what is their legal and regulatory environment?
What is a PPA?
Put simply a PPA is an agreement between an independent power generator (or vendor) and a purchaser (often called the ‘off-taker’) for the sale and supply of energy. They can be used for the supply of any type of energy, but in more recent times have often been used for the supply of renewable energy such as through solar panels or wind generators.
A PPA can take on two general forms. In a physical PPA, energy is physically supplied and sold directly to the purchaser. The power generator is usually not connected to the wholesale National Energy Market (NEM). A virtual or synthetic PPA involves two distinct agreements which operate in parallel. Unlike a physical PPA, the energy is not physically supplied and sold directly from the generator to the purchaser. Instead the generator must connect to the NEM, where the purchaser is supplied energy through a contract with an authorised market retailer. At the same time a separate agreement, often taking the form of a ‘contract-for-differences’ is agreed between the generator and the purchaser to guard against fluctuations in the spot price for electricity which will be reflected in the retail contract. This means that, in effect, the energy and relevant renewable energy certificates are provided to the purchaser at a ‘fixed price’.
Why enter into a PPA?
PPAs may be advantageous to any organisation, such as UNSW, which seeks to reduce its carbon footprint. Whether in its physical or synthetic forms, through a PPA with renewable energy, a purchaser can ensure that a certain amount of renewable energy is produced.
Of course, there are economic considerations that an organisation will need to take into account before entering into a PPA as well, including:
- Wholesale price uncertainty. A PPA allows the organisation to lock in a price for electricity over an extended period. The purchaser can benefit from not being subject to the price fluctuations of the wholesale energy market. On the other hand, this may lock the organisation into a price higher than it would otherwise pay;
- Generator failure. The purchaser needs to take into account the risk that the generator will fail and be unable to supply energy as agreed and how they might insure against such failure.
What is the regulatory and legal environment for PPAs?
All energy suppliers in NECF participating jurisdictions, including independent generators that supply energy through PPAs, are subject the supervision of the Australian Energy Regulator (AER). AER requires that such suppliers hold either an exemption or a retail authorisation and must provide certain consumer protections. Whether or not they are subject to the consumer protections under the National Energy Retail Law, all such vendors are subject to the Australian Consumer Law.
If the PPA involves a ‘derivative’ financial instrument (as synthetic PPAs generally do), the supplier may be required hold an Australian Financial Services (AFS) licence, and be subject to the authority of the Australian Securities & Investments Commission (ASIC). To read more go to https://compliancequarter.com.au/otc-electricity-derivatives/.
Another matter that anyone entering into a PPA may need to consider is whether a security interest should be registered on the Personal Property Securities Register (PPSR). For example, if a vendor is physically supplying a solar panel to the purchaser’s premises this can protect their legal interest in the solar panel (for general information on the PPSR see https://compliancequarter.com.au/ppsr-changes/).
If you think we could be of any further guidance in this area, please don’t hesitate to get in contact.
 For more information and a good general introduction to PPAs see the following guide produced by the United States Department of Commerce http://cldp.doc.gov/sites/default/files/Understanding_Power_Purchase_Agreements.pdf.