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What are PPA Head of Terms (HoT)?

PPA Heads of Terms (HoT) is a document that sets out the terms of a commercial transaction agreed in principle between parties in the course of negotiations of a Power Purchase Agreement. The main objective of HoT is to have written confirmation of the main terms agreed in principle as well as to outline a timeline and obligations between the parties. Once PPA Head of Terms is finalized, it can make a part of the Power Purchase Agreement (PPA).

Therefore, it’s important to agree on the main principles well in advance of a PPA contract signature. In this article, I am going to discuss the main topics that you want to cover in HoT. Please note that this may not reflect the full range of issues applicable to a particular PPA project. However, it should give an overall picture of PPA HoTs.

1. Parties. Here you want to clearly specify the header of the contract, including information about the contracting parties, e.g. buyer and seller, their legal registration address and contacts.
2. Settlement of electricity. Physical or financial settlement of electricity. Please specify here your preferred option.
3. Expected start date of supply (COD). Here you should indicate an exact date when you want your PPA contract to start delivering electricity to your site.
4. Tenor. This is a duration of a PPA agreement. The PPA contract duration is typically 10 years or longer. However, you can also indicate that the Producer can propose his preferred term without any obligation to the Buyer to accept.
5. Estimated date of PPA contract signature. Please indicate when you endeavor to award and sign a PPA contract with a producer so he could plan his project delivery timeline accordingly.
6. Volume of the PPA. Please indicate desired PPA volume in MWh/year output.
7. Price type. PPA price can be either fixed, variable, or a hybrid, e.g. a combination of the both models
8. Price Target. Here you can provide your price target or specify that you expect the PPA contract to be priced purely based on investment/production cost, plus reasonable profitability.
9. Guarantees of Origin (GO). Here you want to specify whether GOs are to be bundled or unbundled from the electricity sold. Normally, you would like the Guarantees of Origin to be delivered together with the electricity. And the quantity of GO shall be equivalent to the volume of electricity.
10. GO Price. Usually, a fixed price is requested.
11. Delivery Point / Delivery conditions. There can be different PPA delivery contract structures available depending on local market regulations.
    •  Sleeved PPA to an existing utility company of the Buyer through despatching mandate
    • Sleeved PPA through despatching contract and delivery on wholesale electricity platform
    • Virtual (Financial) PPA as a Contract for Difference (CfD) indexed to a wholesale market price index
12. Conditions Precedent. Here you want to specify the main conditions as a pre-requisite for the PPA contract to be entered into full force. These are typically are:
    • The power plant project has obtained all the necessary licenses and authorizations to be built (“Ready to Build”), and enter into commercial operation (COD).
    • The Producer has formalized an Engineering, procurement and construction (EPC) contract for the power plant and relevant infrastructure.
    • The Producer has obtained financing for the power plant construction.
    • The Producer has provided a work schedule for the project, including financial closure, the commencement of site work, energization of the connection point, and COD date
13. Construction & Commissioning. You want to request detailed planning with the main project milestones until its commercial start-up (COD). The planning will include at least:
    • Estimated Financial Closing Date
    • Estimated start date of construction works
    • Committed COD date

If at the time of signing the contract the Project is not “Ready to Build”, the Producer will also detail, in the previous planning, all the necessary permits, licenses and authorizations, both those already obtained and those pending to reach that state.

14. Reporting. As a PPA Buyer, you want to request access to the monitoring system of the power plant related to the PPA, and will receive regular operation reports.
15. Applicable Law. Please indicate the local law of the country where you negotiate the PPA supply. You can also indicate Law references to another jurisdiction, but it’s not a common practice in a physical PPA delivery.  
16. Change of Law. If due to any change in applicable law or regulations subsequent to the date of the PPA, the performance of any provision of the PPA shall become impracticable or impossible, the parties shall use their best efforts to find and employ an alternative means to achieve the same, or substantially the same, performance, preserving the global balance of rights, obligations, benefits and risks.
17. Disputes/Courts. Disputes that cannot be resolved directly between the parties will be dealt with in court. Please indicate here a court in which you want to handle such disputes.
18. Guarantees provided. Please request some financial guarantees, such as compliance or performance guarantees at least from the Producer. Please note that a Buyer can be also requested to provide collateral or financial guarantees.
19. Communication. The parties may jointly agree to make any public announcement or press release about the existence of the PPA and details of the power plant.
20. Naming Rights. The Buyer shall enjoy all lifetime benefits in naming the power plant. The Producer shall grant the Buyer unlimited title in this respect.

If you are interested to learn more about Power Purchase Agreements (PPA) and PPA price types available in the market, please check out my prior article here. If you wish to get the latest energy market news and trends, please check the weekly power market reports here. To access the PPA Head of Terms (HoT) negotiations playbook, the link is here.

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