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Power plant development belongs more to the infrastructure sector, in the sense that these are investments that pay off well in long term, and rely on long term agreements rather than dynamic short term sale transactions.
A Power Purchase Agreement, is a contract for purchasing renewable energy, is a straight forward and effective way that an organization can procure renewable energy.
When working with a PPA Structure Model, there are involvements of utility company and developer company. Developer company install, operate and maintain power plant while utility company handles transfer of energy from the renewable energy project to the buyer.
Sale to Government
Government usually refers to state power generation or distribution companies (TANGEDCO, APTRANSCO, MAHAGENCO) or other large central power entities such as NTPC. There are two ways you could sell power to these state utilities.
- PPA/FIT – A Power Purchase Agreement (PPA) is signed with the DISCOM, usually for 25 years, where the price of power (Rs./kWh) is either determined through competitive bidding or a Feed-In-Tariff (FIT) is fixed by the government. This is the most popular form of power sale in India today
- APPC + REC – The solar plant developer sells power to the DISCOM at Average Pooled Power Cost (APPC) which is fixed by each state, and is usually lower than the PPA/FIT tariff (Madhya Pradesh APPC – Rs. 2.79/kWh; Karnataka APPC – Rs. 3.06/kWh). The developer additionally receives Renewable Energy Certificates (RECs) that can be sold to entities with a Renewable Purchase Obligation (RPO). This model is currently not very popular in India due to poor sales of RECs
Sale to Private Consumer
A private company is free to purchase power from whoever they wish, with only a few constraints attached. You could sell the power generated to private companies as well. This route typically is through a power purchase agreement.
- PPA –The solar plant developer signs a PPA with a private consumer for sale of power. The price is usually decided based on negotiation. The PPA term may only be 5 years initially. The private consumer will need to apply for Open Access to buy power from anyone other than the utility
- Solar developers who sell power to private consumers are entitled to RECs, provided the consumer is not under a Solar Purchase Obligation
Captive Consumption
For power plant developers who also happen to be running energy intensive businesses, the third route to sell power is through the captive consumption of the solar power generated by their own power plant.
- The solar plant developer is also the consumer of power. Here, the cost to consumer is the cost of obtaining solar power at the facility i.e., landed cost of power
- A captive plant need not be located at the facility. If located some distance from the facility, the cost of transmitting power to the facility (including open access charges) will need to be paid to the grid operator. This cost will need to be added to the cost of generation of solar power to arrive at the landed cost of power at the facility
Solar generation under captive consumption is also eligible for RECs, provided that no concessions have been obtained.
Pros & Cons of Various Solar Power Business Models
| Business Model | Pros | Cons |
| Sale to Utility | Long term PPAs viable and bankable, in the case of at least some states | Rates might not be very attractive, especially in the regime of competitive (reverse) bidding |
| Large power plant PPAs possible as the buyer is a very large distributor of power | Poor health of state DISCOMS could pose payment delays and hence poor cash flows | |
| This model is allotment driven and hence feasible only under scenarios where there are such government allotments |
| Sale to Private Consumer | No need for government policies or allotments, purely market driven | Long term PPAs are difficult except in the cases of very large corporate |
| Could have attractive tariffs, as this is a bilateral agreement between two private parties | Large corporate might set up their own captive solar power plants instead of buying from third parties, and so there might be challenges for this attractive segment | |
| REC benefits can be availed, through the market for RECs is yet to take off meaningfully | High wheeling, banking and cross subsidy charges might weaken the business case |
| Captive Consumption | No need for government policies or allotments, purely driven by the cost of energy | This might not be possible for every developer. In fact, IPPs in most cases operate only power plants and they have no other businesses (though they might have companies that are related to them in some fiduciary way) |
| Tying in the cost of energy for your company for 25 years, as against uncertain grid power cost escalations during the same period | Captive power plants require significant upfront capital costs, something many companies might not find feasible | |
| REC benefits can be availed, through the market for RECs is yet to take off meaningfully |
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