What is PPA?
A renewable energy power purchase agreement (Green PPA) is a contract between a commercial or industrial off-taker or customer (C&I) and a green power producer (SPV) for the purchase of power generated by renewable energy assets. These contracts are often long-term contracts, with a duration between 5 and 20 years.
The customer doesn’t take ownership of or invest in specific renewable equipment, like wind turbines or solar panels that generate electricity. Instead, the customer commits to buying the electricity and its attributes (e.g., the renewable energy certificates, “RECs” or Guarantees of Origin) produced by the equipment installed by the energy provider.
Why are power purchase agreements important?
A PPA contract can be attractive for several reasons.
- A PPA is a viable alternative to investing in and managing renewable energy projects, especially for commercial and industrial customers with limited technical expertise. Thus, it avoids risks associated with project development and equipment ownership for both parties.
- A PPA allows commercial and industrial customers to hedge against future price increases while providing renewable energy developers with an avenue to access. Additionally, a PPA is crucial in financing renewable energy projects.
- PPAs are environmental drivers, being pivotal in the CSR communication towards stakeholders: clients, employees, shareholders, banks, governments
- PPAs are financial drivers, being essential in saving on energy bills and providing risk mitigation through long-term hedging
Most common types of PPAs
Sleeved/direct PPA
A sleeved PPA is a contract between a power producer and an off-taker who agree on a fixed price for a specified longer period. The sleeved PPA requires a utility company to be appointed as the intermediary handling energy transfer between the two parties. The utility then sleeves the energy through the grid and supplies the off-taker, possibly charging a sleeving fee. The top-up energy is supplied as necessary by the same or another utility.
Some of the disadvantages of using this type of contract include:
- More complex than a financial PPA (see below)
- Back-to-back required with the short-term top-up supply contract
- Supply contract depending on the performance of the renewable asset
Virtual/financial PPA
A virtual PPA is a financial contract that does not involve a contractual energy transfer between parties. Instead, it is a financial structure, also called a contract for difference, in which an off-taker and a green power producer agree on a fixed price. Under this structure, the green power producer sells energy into the wholesale market, and the off-taker will then pay (or potentially be paid) the difference between the strike price and the wholesale price.
This type of contract is less complex than a sleeved PPA, however:
- It is possibly a financial derivative (IFRS 9)
- There might be a need for a perfect hedge impacting the supply contract
Who can benefit from a PPA?
PPAs have increased in frequency over the last years and are becoming a popular way to develop renewable energy projects. They can be contracted for short or long tenors, typically between 1 and 25-years long, with different prices. Both energy buyers and sellers can benefit from using a PPA to reach their renewable energy goals.
Energy buyers can range from corporations with a large demand for electricity across their operations to energy utilities. Energy sellers can include infrastructure funds investing in renewable energy, independent power producers, or companies that wish to construct their own renewable energy assets.
Why should you use Greensolver for PPA consulting services?
Greensolver understands how volatile the market is and can offer various solutions suited to your needs or expectations. We have several stand-alone services or can assist from the very beginning of your PPA approach to the contractualisation of the project. These include PPA structuration, pricing, performance reports, negotiations on behalf of the customers, and so many others.
Find out more about our comprehensive scope of PPA consulting and advisory services here.
Contact us to speak to a PPA specialist and see how we can assist your project.
