Everything You Should Know About Power Purchase Agreements

Is your commercial or industrial establishment employing the smartest energy strategy?
26 September, 2022 by
Everything You Should Know About Power Purchase Agreements
T&T Power Group.

Power Purchase Agreements are used to finance a range of energy projects. With that said, they can be rather complicated to understand - which is why we’ve created this article to help address your most pressing questions and concerns about PPAs.

The soaring costs of energy have prompted a high demand for cost-cutting solutions, while securing a steady, dependable supply to keep up with the modern needs of an ever-changing industry. In the past ten years, energy consumers in many jurisdictions have seen electricity prices growing at a rate even greater than inflation.

In fact, heavy industrial electricity users in Southern Ontario have seen their cost for power increase more than 50%, which, according to a recent report, has led to more than 75,000 job losses in the province’s manufacturing sector alone.

These increased costs have fuelled a widespread interest in onsite power and off-grid technology. And with advancements in power generation, there are now some very cost-effective alternatives to buying electricity from local utility providers.

In recent years, we have seen tech companies like Apple, furniture manufacturers like Ikea, and even the most secure data centres invest in off-the-grid power sources. And although there are many other companies considering the off-grid approach, some simply do not have the upfront capital required.

However, this problem has been eliminated by what is referred to as a “Power Purchase Agreement”. By signing a Power Purchase Agreement, dependence on an expensive and unreliable electrical grid can be reduced and benefits from the lower cost of onsite power generation can be realized, with zero capital outlay.

What is a Power Purchase Agreement?

A Power Purchase Agreement (PPA) is a long-term agreement or contract that administers the sale and purchase of electrical power or energy. This contract, sometimes referred to as an “offtake agreement”, is made between two parties: the power generator and seller, referred to as an Independent Power Producer or “IPP” such as T&T Power Group, and the power purchaser or buyer (the off-taker). In a PPA the off-taker doesn't own any of the new power generation and distribution equipment installed for the project, they simply buy the energy produced at an agreed upon rate.

The contractual terms of most PPAs may last five or more years (up to 20) and can be set up on a monthly fixed fee, a per kW-hour fee, or a combination of both. Each circumstance will dictate the best solutions for both parties.

Who benefits from a Power Purchase Agreement?

Any facility that uses significant amounts of electricity can be an excellent candidate for a Power Purchase Agreement. Commonly, these include greenhouses, industrial facilities, commercial buildings, and government institutions. While entering a PPA will mean less savings in comparison to purchasing the equipment directly, there are several benefits that are unique to those who engage in one of these agreements.

For example, the ongoing operation and maintenance of an onsite power plant requires significant operational bandwidth. For many facilities, this would mean hiring additional employees or investing heavily in training and certification. However, all maintenance (routine or otherwise) is included in a Power Purchase Agreement, meaning zero operational cost or headaches to the off-taker. The IPP (T&T Power Group) would be solely responsible for keeping the plant running smoothly 24/7.

According to a recent report out of Europe, it is estimated that businesses could save around 38 billion US dollars while also reducing their harm to the environment by going off-grid. So, whether you are saving 50% with the ability to purchase your equipment immediately or are saving 30% by entering a PPA, you will be saving a great deal of money.

An additional benefit to the off-taker of a PPA is the ability to limit one's exposure to significant energy price spikes, while reducing the potential for business interruption.

Which projects can be financed with a PPA?

While power generation equipment may be installed for many reasons, some are a better fit for a Power Purchase Agreement than others.

The most common reason a generator gets installed is to provide backup power in the event of a power outage from the local utility company. Known as ‘Emergency Standby Generators,' these units utilize an Automatic Transfer Switch to turn on whenever an outage occurs and are rarely activated for any other reason. Due to the relatively low running hours, standby generators are quite affordable and are therefore a better fit for more conventional leasing and financing structures.

Power Purchase Agreements are most beneficial when applied to any continuously running generators. Unlike standby generators which might run less than 100 hours per year, a continuous generator is designed to carry heavy electrical loads 24/7 for 8,000 or more hours per year. As one can imagine, the capital requirements for continuous generators are much higher than standby generators due the extreme duty they must be built to endure.

While traditional financing options would require a hefty down payment and large monthly payments, a PPA allows the off-taker to bypass ownership of the equipment and simply purchase the needed electricity per kW-hour, at rate lower than they would have otherwise paid their local utility company.

Combined Heat & Power PPAs

Combined Heat & Power' (CHP), also called ‘Cogeneration', is an energy efficient technology whereby generators create electricity, and heat exchangers are used to capture waste-heat from the combustion process to create useful steam or hot water. This allows those employing the system to use the hot water and steam for heating or cooling living spaces, for domestic hot water, or for industrial processes.

For every unit of thermal energy recovered from the CHP generator, load will be reduced on conventional heating and cooling equipment leading to additional savings and reduced emissions. Furthermore, in some cases installing a CHP generator may reduce the need for new heating systems.

Unlike with conventional fossil fuel power generation which only generates at up to 45% efficiencies, leading to unnecessary waste, CHP systems can achieve an impressive 90%+ efficiency rating - making them one of the greenest methods for producing power with fossil fuels. This is due to the fact that the system requires less fuel to meet its energy demand, lowering greenhouse gas emissions. These increased efficiencies also have the added value of lowering the energy costs of the buyer/customer.

These efficiencies and benefits of CHP can be even further elevated in the right agricultural setting by the capturing and reuse of carbon dioxide exhausted from the generators for crop fertilization.

For many facilities with a significant thermal load, incorporating CHP technology into a Power Purchase Agreement means even greater energy savings as well as a reduction in emissions.

Peak Shaving and Shared Savings Agreements

In Ontario, the notorious Global Adjustment fee (GA) was incorporated into to electricity pricing over 10 years ago, and now makes up more than 70% of the average industrial customer's monthly bill. However, GA can be reduced by 50% or more with a solution known as peak shaving. While most beneficial for customers in Ontario, Peak Shaving can be worthwhile for anyone in a jurisdiction with significant capacity charges.

Peak Shaving is best done with an on-site generator during periods of high demand. This type of generator can be deployed automatically during high demand hours, or for the hours whereby it is predicted that the global adjustment measure is likely to be completed.

Although installing this equipment may seem like a costly investment initially given that the generators are only used for short periods of time, using an on-site generator to assist in Peak Shaving can result in substantial savings long-term.

In a recent research report by a private company it was concluded that a typical 3 MW on-site power system installed in Ontario has the potential to save the organization more than $1.7 M annually. T&T Power Group Peak Shaving generators recently installed at a major auto manufacturing plant have resulted in savings of more than $6 M per year.

Due to the relatively low annual running hours of a Peak Shaving generator system, they are not well serviced by a Power Purchase Agreement featuring per kW-hour pricing. Instead, this type of project can be financed with a Shared Savings Agreement (SSA), but there are may similarities between the two. Just like a PPA, an SSA allows the customer to avoid all the capital expenses required to procure and install the system, as well as all the ongoing operational expenses such as fuel and maintenance. The independent power producer (T&T Power Group) would own and operate the peak shaving equipment for the full term of the agreement, typically 5-20 years.

Unlike a PPA, the off-taker would not pay a fee per kW-hour, but instead give up a share of the savings generated by the Peak Shaving generators. For example, if installing a generator system for peak shaving resulted in $2M total savings each year, the customer and the IPP would each get $1M if the split was 50-50.

Initially, the idea of signing a Power Purchase Agreement or Shared Savings Agreement for your organization may seem intimidating.

There are an overwhelming number of options available with regard to power sources and technologies - and we understand how this can be stressful.

But while the smartest energy strategy for your facility will require some thoughtful planning, a cost-effective and efficient energy plan is something that power customers everywhere should strive to achieve - and having the right Agreement in place with your power provider likely is one of the best investments you can make.

Contact the power experts at T&T Power Group for help.

Share this post