A power purchase agreement (PPA) is a contract between a company that generates electricity (the seller) and one who is looking to purchase electricity (the supply-chain buyer).
Typically distribution company is a supply-chain (intermediate) buyer. Distribution company commits a business to Generating company -- that it will buy all electricity produced by a generating company -- when distribution company is not sure about electricity demand from end buyers (consumers) of electricity. Distribution company takes a business risk.
This happens only in electrical power business -- that a link between supply chain is exposed to business risk -- and not the original manufacturer.
Take an example of automobile industry. Maruti Suzuki manufacture motors. Sai Services is sales and services agent of Maruti Suzuki. Maruti Suzuki takes complete ownership of its business and is exposed to business risk. Sai Services never commits that it will buy all the motors produced by Maruti Suzuki. Picture shown below explains the situation.
Then why electrical power industry is different that automobile industry? The only reason I see is to protect private players in power generation as majority of distribution companies are owned by state governments.
Typically distribution company is a supply-chain (intermediate) buyer. Distribution company commits a business to Generating company -- that it will buy all electricity produced by a generating company -- when distribution company is not sure about electricity demand from end buyers (consumers) of electricity. Distribution company takes a business risk.
This happens only in electrical power business -- that a link between supply chain is exposed to business risk -- and not the original manufacturer.
Take an example of automobile industry. Maruti Suzuki manufacture motors. Sai Services is sales and services agent of Maruti Suzuki. Maruti Suzuki takes complete ownership of its business and is exposed to business risk. Sai Services never commits that it will buy all the motors produced by Maruti Suzuki. Picture shown below explains the situation.
Then why electrical power industry is different that automobile industry? The only reason I see is to protect private players in power generation as majority of distribution companies are owned by state governments.
