What Does a Power Purchase Agreement Mean in the Utilities Sector?

Traditionally, a power purchase agreement, or PPA, is a contract between a government agency and a private utility company. The private company agrees to produce electricity, or some other power source, for the government agency over a long period of time. Most PPA partners are locked into contracts that last between 15 and 25 years. Still, they can otherwise vary dramatically in terms of the commissioning process, curtailments, transmission issue resolution, credit, insurance, and environmental regulations.

PPA Financing

A PPA is an example of "third-party" ownership. The government agency becomes the sole client of the private energy company, but there is often a separate investor to act as the system owner. This system owner offers investment capital to the project in return for tax benefits or other favors. In the United States, most system owners are limited liability corporations, or LLCs, controlled by financial institutions.

This system is designed to mitigate costs and provide access to capital where it otherwise would not exist in a single-provider, government-monopolized utility arrangement. The developer receives access to capital and a competition-free consumer base, the investor receives returns and tax benefits, and the government agency maintains control over the distribution of energy in its jurisdiction.

In emerging markets where capital is limited and hard currencies present exchange rate risk, PPAs help governments meet the rising demand of electricity from their people by securing international partners to fund and develop the power plants.

Energy Policy Act of 2005 and FERC

Every power purchase agreement is regulated by the Federal Energy Regulatory Commission or FERC. In 2005, the Energy Policy Act concentrated control of natural gas, electricity, hydropower, and oil pipelines to FERC.

FERC is one of the least-known yet most influential economic, regulatory bodies in the United States. It has the power to set prices, award contracts, punish power companies, and instigate/delay lawsuits. Environmental activists have roundly criticized it for being overrun by energy company lobbyists and economists and smaller power providers for contributing to a lack of competition in the industry through its PPA process.

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  1. National Renewable Energy Laboratory. "Power Purchase Agreement Checklist for State and Local Governments," Page 1.

  2. Federal Energy Regulatory Commission (FERC). "Energy Policy Act of 2005 Fact Sheet."

  3. Federal Energy Regulatory Commission (FERC). "What FERC Does."

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