Power Purchase Agreement (PPA)

A Power Purchase Agreement (PPA) is a long-term contract between an electricity generator and a buyer, typically a state or central distribution company, that specifies the price, quantity, delivery terms, and conditions under which the generator will supply electricity to the buyer over a defined period, usually 25 years for renewable energy projects. PPAs are the foundational commercial contracts underpinning India's Rs 3+ lakh crore annual power sector procurement.

What is a Power Purchase Agreement (PPA) in government procurement?

In India's restructured electricity sector, electricity generation is mostly private and competition-based, but distribution is dominated by state DISCOMs (Distribution Companies), government-owned entities that buy power from generators and supply it to consumers. The PPA is the contract through which this purchase happens.

For renewable energy, PPAs are signed after competitive bidding. SECI (Solar Energy Corporation of India), NTPC, state DISCOMs, and state nodal agencies float tenders inviting solar, wind, or hybrid renewable power developers to bid on a Levelised Tariff basis, the single price (in Rs per kWh) they require for 25 years to build and operate the plant. The lowest bidder wins and signs the PPA at the discovered tariff. This competitive mechanism has driven Indian solar PPA tariffs down from Rs 17/kWh in 2010 to Rs 2.1-2.5/kWh in 2024, among the lowest in the world.

For thermal power (coal, gas), PPAs were historically negotiated directly between generators and DISCOMs, but all new capacity now goes through competitive tariff discovery. Central generating stations (NTPC coal plants) sell power to DISCOMs at CERC-regulated tariffs under Bulk Power Transmission Agreements, a specific type of PPA for regulated utilities.

A PPA specifies: installed capacity and annual energy generation commitment, the tariff (either fixed for 25 years or with defined escalation), the point of delivery (typically the interstate transmission substation), penalties for shortfall in generation, scheduling and despatch procedures, force majeure events, termination provisions, and dispute resolution through CERC or state electricity regulatory commissions.

Why it matters for bidders

For renewable energy developers and IPPs (Independent Power Producers), the PPA is the fundamental commercial document. Without a signed PPA, project finance is impossible, lenders need the assured revenue stream of a 25-year PPA from a government-backed DISCOM to provide debt. The tariff in the PPA determines the project's IRR, bid too high and lose the auction; bid too low and the project is financially unviable.

Bidding renewable energy auctions requires sophisticated financial modelling: capital cost projections, equipment prices (which have fallen dramatically for solar panels and wind turbines), O&M cost escalation, debt structuring, and sensitivity analysis. Companies that have bid conservatively (higher tariffs) lose auctions; companies that have bid aggressively (lower tariffs but underestimated costs) end up in financial distress during construction or operation.

EPC contractors and O&M service providers find opportunities downstream from PPAs. Each PPA-backed renewable project requires EPC procurement for construction and O&M procurement for 25 years of operation. These procurement exercises, often worth Rs 100-5,000 crore per project for EPC and Rs 5-20 crore annually for O&M, flow directly from the signed PPA.

Example

SECI issues a 500 MW solar PPA tender to be installed in Rajasthan. Developers bid on the Rs per kWh tariff at which they will supply electricity to SECI for 25 years. The auction conducts multiple rounds. The final L1 tariff is Rs 2.18 per kWh. SECI signs a PPA with the L1 developer at Rs 2.18/kWh for 500 MW for 25 years. SECI simultaneously signs a back-to-back PPA with state DISCOMs who will offtake this power at a slightly higher tariff (Rs 2.35/kWh) that covers SECI's intermediation costs. The developer then floats their own EPC tender for the solar plant, competitive bids from EPC contractors determine the plant construction cost, which must fit within the financial model that justified the Rs 2.18/kWh tariff bid.

Key rules / thresholds

CERC and state electricity regulatory commissions regulate all PPAs involving regulated utilities (DISCOMs). New PPAs are approved by the relevant commission before execution, a process taking 2-4 months. The tariff discovered through competitive bidding is "pass-through" to end consumers in the DISCOM's Annual Revenue Requirement filings. PPAs for renewable energy projects must comply with MNRE guidelines on RPO, wheeling charges, and banking provisions. Termination payments in PPAs are significant, a generator terminated for DISCOM default receives a buyout payment based on a formula involving invested equity and outstanding loans.