INTRODUCTION TO POWER PROCUREMENTPOWER PURCHASE AGREEMENTS

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INTRODUCTION TO POWER PROCUREMENT/POWER
PURCHASE AGREEMENTS

• by
• K Venugopal
• Member, DERC
• 04th July, 2007
• IIT (Kanpur)

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What is a Contract?

• An Agreement signed by two parties who are
  competent to enter into a contract
• Contract Indian Contracts Act, 1872
• Who is Competent?
• - a major person
• - of sound mind
• and the Contract is for a consideration
• It spells out the rights and obligations of the
  two parties

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For a Contract

• An offer has to be made by one party and accepted
  by the other party
• The consideration is to be decided at the time of
  acceptance.
• Contract for supply or erection vis-à-vis a
  contract for services over a period of time.

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Distinction between a Supply, Erection, Testing
and Commissioning Contract and a Power Purchase
Agreement

• The first one is for supply erection, testing and
  commissioning and handing over of the plant and
  equipment to the buyer. The buyer operates the
  plant
• Ownership changes at this point of time
• In a PPA, the power plant is owned by the
  developer for the entire term of the PPA and only
  power is sold for a consideration
• Contd.

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• The PPA sets out the rights and obligations of
  the buyer and seller over a time horizon of 15 or
  20 or 25 or 35 years, as the case may be.
• PPA is all about allocation of risks between
  buyer and seller
• Allocate risks to the party which can better
  manage the risk
• If the risks are allocated wrongly, it will add
  to the costs.
• Contd.

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• PPA decides the revenue stream of the project
• In case of non-recourse financing, the project
  and project documents like PPA are the only
  covenants
• Other assets of the developer/promoter will not
  act as covenants to the project being developed
  on non-recourse basis
• The Lenders would evaluate the PPA to ascertain
  the financial strength of the project.

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Typically, a PPA comprises of the following
Chapters

• Preamble
• Definitions and interpretation
• Conditions precedent
• Term of the PPA
• Development stage
• Construction period
• Commissioning and entry into Commercial service
• Contd.

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• Plant operation, maintenance and fuel supply
  management
• Availability declaration
• Measurement of capacity, availability and energy
  metering.
• Capacity charge and payment
• Energy charge payments
• Billing procedures and terms of payment
• Insurance
• Changes in law, including tax laws
• Contd.

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• Force Majeure
• Termination and Buy-out provisions
• Governing law/dispute resolution
• Liability/indemnity
• Confidentiality
• Representation
• Notices
• Miscellaneous

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Schedules appended to the PPA

• Description of Power Station
• Clearances
• Development milestones
• Inter-connection and transmission facilities
• Commissioning and testing
• Metering Standards and Testing
• Dispatch Procedures
• Tariff Schedule
• Capacity payment
• Energy payment

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Role of SERC

• Section 86 (b) The State Commission shall
  discharge the following function namely
• regulate electricity purchase and procurement
  process of distribution licensees including the
  price at which electricity shall be procured from
  the generating companies or licensees or from
  other sources through agreements for purchase of
  power for distribution and supply within the
  State

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Process

• Demand forecast by DISCOM
• Supply availability
• Gap
• How to fill up the gap
• - Long term contracts
• - Short term contracts
• - Procurement through day ahead Power
  Exchange
• - Drawal from the Grid within IEGC limits?

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• Section 62 (1)
• The Appropriate Commission shall determine the
  tariff in accordance with the provisions of this
  Act for
• (a) supply of electricity by a generating company
  to a distribution licensee
• Provided that the Appropriate Commission may, in
  case of shortage of supply of electricity, fix
  the minimum and maximum ceiling of tariff for
  sale or purchase of electricity in pursuance of
  an agreement, entered into between a generating
  company and a licensee or between licensees, for
  a period not exceeding one year to ensure
  reasonable prices of electricity

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• Section 63
• Notwithstanding anything contained in Section
  62, the Appropriate Commission shall adopt the
  tariff if such tariff has been determined through
  transparent process of bidding in accordance with
  the guidelines issued by the Central Government.
• Guidelines issued by the Central Government from
  time to time for
• Long-term Power Procurement 25 years
• Medium-term Power Procurement Less than 7 years

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