For Educational Purposes only
The main informational issues for Energy Regulatory Authority are:
- What types of cost are reviewed;
- What types of risks are assessed;
- How these two categories of information will be assessed jointly
This article outlines Energy Regulatory Authority's common methodology for dealing with these issues. The methodology requires that the applicants provide information on both price and risk allocation between the seller and the purchaser because both factors inﬂuence the actual payments made by the purchaser under a PPA.
For example, a PPA may propose low initial prices for capacity and energy but transfer most performance risks (e.g., target availability) to the purchaser, so that the purchaser may actually pay a lot more for power procured under the PPA than under another PPA with higher initial prices but with more risk borne by the seller.
If a licensee proposes to bear more risk than usual, it will generally incur an additional cost for bearing this risk and it will expect to be compensated for this cost. The proposed methodology tries to capture this trade-off between risk and price under a PPA.
The pattern of risk allocations that is feasible in developing markets at this time may be quite different from patterns of risk allocation that are feasible and observed in more developed power sectors such as power sectors where there is better quality of service, lower levels of technical and commercial losses, an average tariff that recovers costs, more extensive metering and sufﬁcient generation capacity.
Therefore, the prices and risk allocations observed in other countries with healthier power sectors may not be appropriate to developing markets. In addition, one particular combination of price and risk may not be appropriate at all times and all circumstances.
As noted earlier, Energy Regulatory Authority’s assessment will be limited to PPAs where the purchaser will be selling directly (through distribution companies) or indirectly (e.g., as a bulk reseller) reselling this power to captive customers. The Methodology proposes to adopt the following three step approach for assessing the reasonableness of PPAs under the second stage of its review process:
- Assessment of a PPA’s completeness
- Performance of the average purchase price analysis, affordability analysis, and risk assessment of the PPA
- Application of the price-risk trade-off approach to assessing PPAs
The ﬁrst step in the Methodology is designed to separate PPAs that are complete from those that are not. In this step, the Regulator will determine whether the PPA satisfies certain minimum, or threshold, conditions that justify further regulatory review.
If the PPA does not satisfy the minimum, or threshold, conditions, then Regulator cannot justify using its limited regulatory resources on further review of the PPA.
Under the second step in Regulator's review, the seller must provide Regulator with a completed copy of the questionnaires and tables. The seller must vouch for its responses to these questionnaires and tables by attaching a declaration to them. The focus of these questionnaires and tables is to abstract basic information from the lengthy and complex documents that are typical of PPAs.
That information will be used to evaluate systematically the reasonableness of the price and nonprice terms of PPAs. Speciﬁcally, the seller’s analysis of the average purchase price and risk allocation for its PPA provides a set of values for these key variables that is used in the third step: the review of the price-risk trade-off. These questionnaires and tables also incorporate a considerable amount of standardization to help NERC to benchmark PPAs.
The purchaser carries out the affordability analysis under this stage, for which it provides a declaration to the Regulator. The purchaser must complete and vouch for its responses by attaching a declaration to it. The purchaser must also submit the extent to which it agrees or disagrees with the seller’s responses to the questionnaires and tables. The purchaser should be able to provide this information from its due diligence on the PPA and related documentation.
PPA Assessment of the completeness of an applicant’s PPA is the ﬁrst step of Regulator’s approach to reviewing a PPA. Once Regulator deems the PPA to have satisﬁed this minimum standard, it will evaluate the PPA for price and the risk exposure to the purchaser under the PPA.
A PPA should cover all critical subjects and not have omissions that might disrupt the operation of the PPA or cause avoidable costs for the seller or purchaser during the life of the agreement. The Regulator may decide to suspend further analysis of a PPA that is not complete in this respect.
The Regulator will create checklists for PPAs for specific power generation technologies. Schedules are attached to the PPA and contain detailed provisions relating to clauses/articles. Both clauses/articles and schedules are integral parts of the PPA, and the PPA is not complete without all of them.