REGULATORY REVIEW OF POWER PURCHASE AGREEMENTS: A PROPOSED BENCHMARKING METHODOLOGY

Box 5.1

General Formula for Calculating the Average Purchase Price Under a PPA
The energy purchase charge (E) covers the costs of the following components: Fuel (EF) Operation and MaintenanceVariable portion (EOV)

The main components of the average purchase price (PAV expressed in US$/kWh) are: Capacity purchase charge (CP) Energy purchase charge (E) Supplemental charges (S)

These components are expressed in US$/month (since a month is the usual billing period):1 PAV = (CP + E + S) /EENERGY where EENERGY is the amount of net electrical energy supplied during the month that is metered at a delivery point specied in the PPA (expressed in kWh/month). The capacity purchase charge (CP) covers the costs of the following components: Investment for power plant and equipment, dedicated fuel supply link, and dedicated transmission link (CPINV) Operation & maintenance Fixed portion (CPOF) Insurance (CPINSUR) General and administration (CPGEN)

These unit costs are usually expressed in terms of US$/kWh. E = (EF + EOV) x EENERGY Unless the fuel market that supplies the power plant is fully liberalized, the cost of fuel is usually indexed to the prevailing market price of this fuel or a benchmark fuel price, which passes through the fuel price risk to the purchaser. Supplemental charges (S, usually expressed in US$/month) cover charges such as plant start-up and ramp-up costs above a maximum number of such events per period specied in the PPA (in which case, the monthly charge is the charge per event times the chargeable number of these events), as well as the costs of providing ancillary services and miscellaneous costs specied in the PPA. Note 1: The selection of U.S. dollars in this illustration as the currency for expressing costs does not preclude the adoption of the naira in practice, where appropriate. An advantage of expressing the values in U.S. dollars is that it will facilitate comparisons with PPAs in other countries.

These unit costs are usually expressed in terms of US$/kW/month. This charge is payable independently of the amount of energy supplied under the PPA: CP = (CPINV + CPOF + CPINSUR + CPGEN) x CCAPACITY where CCAPACITY is the average available capacity provided during the month (expressed in kW).
Source: Besant-Jones, Tenenbaum and Tallapragada.

level of charges under the PPA. NERC expects, however, the seller and purchaser to consider all the relevant factors in their analysis. Sellers will be required to provide the information needed to compute the average purchase price of power under the PPA by completing the questionnaire reproduced in Annex 1. They will also be required to complete a summary table shown Annex 2, based on their responses to the questionnaire in Annex 1. The purpose of Annex 2 is to provide a convenient summary of the key components of overall average purchase price of power and the factors that affect this average price. In the event that information given in Annex 2 is not consistent with information
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given in Annex 1, NERC will use the information given in Annex 1 for its assessment.

Purchasers Price versus Sellers Cost

The average purchase price is calculated from the purchasers perspective under the PPA. It depends on the actual costs incurred by the seller in developing, constructing, operating, and nancing the plant over the life of the plant (life-cycle cost). The capacity purchase charge spreads (levelizes) over a period of years specied in the PPA the construction and other initial costs