Power Purchase Agreement Management Master Class

PPA is the master agreement governing Independent Power Producer activity. For most under this agreement they are prohibited from selling neither directly into the grid, nor to consume power that the produce directly. PPA typically involves the following stakeholders; IPP developers (purpose built corporation), financing agency (banks, soft loan agency, government guarantee), regulator, energy supply company (oil, gas, coal, or renewable), EPC contractor, sovereign power, lawyer/legal advisor, and consultants.

The economics of IPPs depend essentially on the sustainability of the long-term power purchase agreements (PPAs) on which they are based. In practice, the reliability of the return for investors is secured through government guarantees for the PPAs, and governments are even finding themselves liable for the cost of political risk insurance claims paid through national (e.g. OPIC) or multilateral (e.g. MIGA) export credit agencies. The effective cost and risk involved in IPPs has turned out to be significantly higher than anticipated, which has led to major stresses on the finances of governments and power authorities in many countries.

The most dramatic illustrations have been seen in the past and continuing lawsuits in India, Indonesia and Pakistan, which have prioritised the enforcement of contracts rather than the challenging of corrupt processes, but the inflexibility of PPAs is imposing rigid and costly burdens on other systems, including Thailand and the Philippines.

Governments may become more reluctant to enter into such guarantees, especially in the light of the recent acknowledgement by the IMF that such PPAs and guarantees contain debt-like obligations and contingent liabilities which should be quantified in assessing their relative attractiveness compared with direct public sector investment in power plants. The Chinese government has already decided (in 2002) to void any guarantees of profits for foreign investors, which will leave IPPs exposed to higher levels of risk.

Asia is facing a power crisis, population growth and demand are outstripping supply everywhere. Production year on year for combustible source increased by 8%, for renewable it is 110% ; for 2010 vs 2011