Power Purchase Agreements Explained – What Does It Really Mean?

The terms “power purchase agreements” may be a bit confusing to some. They may conjure up images of executives with a lot of power making purchases. The truth is that power purchase agreements are contracts that two parties have where one party generates the electricity and the other person buys the electricity. To have it explained more simply: the terms are meant literally and not figuratively. The contract specifications vary depending on the electricity source, whether it is solar, wind, hydro, etc. All of the specifications will be spelled out explicitly so that there are no confusions when it comes to what is expected from either party. That is how even the most basic contracts work.

There are several different types of power purchase agreements:

  • Solar Power Purchase Agreements – These contracts are for electricity that comes from the sun. There is a tax credit from the U.S. government that serves as a heavy incentive for people to use solar power as their means of electricity. Those who can benefit from this credit are the ones most likely to seek out these contracts.
  • Wind Power Purchase Agreements – These contracts are for electricity that is generated from wind. They are a little less often seen, but there are some contracts of this nature out there.
  • Federal Power Purchase Agreements – Because of regulations, the US government can’t enter a contract for a longer period of time than 10 years. Most other contracts like this are for at least 15 years.

As with any other type of contract, these agreements are legally binding. Both parties must live up to their end of the bargain or face penalties for breach of contract. This even goes for the contracts with the government. There are a lot of safeguards in place when it comes to government contracts to make it less likely that the government will try go back on what was originally agreed upon when the purchase agreement was drafted.

From a financial standpoint, it is best to view power purchase agreements just like you view regular contracts. Each party agrees to either deliver the service or good while the other party agrees to pay for the service or good for a specified amount of time. Furthermore, neither party can go back on the agreement without having to face some heavy penalties. There you have power purchase agreements explained in its most simplistic way.

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