Types of Power Purchase Agreements (PPAs)

It’s been another strong year for PPAs or Power Purchase Agreements in Europe. 2020 saw more than double (53) of PPAs signed compared to 2018 with ‌5.8 GW of CPPAs (Corporate Power Purchase Agreements). Spain and Germany seem to be the largest European markets for CPPAs.  

Previously, we’d covered how important PPAs are for the renewable energy transition and also detailed about the largest PPAs out there. Here, though, we are going back to the basics.  

Let’s take a better look. 

Definition of PPA power purchase agreement

A Power Purchase Agreement (PPA) is often an agreement between two: the renewable energy (RE) maker and a client (a power buyer or a merchant). The PPA is a legally binding and custom-made understanding that defines how much power the power maker will provide, at what costs, and what duration. This is a safe bet for corporations against market cost fluctuations and is a stabilizing factor in long-term power delivery.

What are the ‌PPAs out there?  

Contextually, types of PPAs ‌overlap because of the wide scope they offer, but here are the basic differentiators. 

Physical PPAs 

The corporate off-taker in a PPA will enter ‌a long term (usually over 10 to 15 years) with a RE generator to take a portion or all of the energy generated by its plant (or a cluster of plants) for a pre-defined price per MWh. They are of three types, with the main difference being the manner in which the energy provider agrees to provide power to a client. 

On-site PPA: This PPA would, you guessed it, give direct access to power and the provider’s plant will be quite close to the buyer’s site, if not in the same vicinity. This gives a big edge for the buyer. Most on-site PPAs are corporate PPAs. Umicore signed one of the largest on-site PPAs in Europe with ENGIE and Axpo to source renewable electricity from offshore and onshore wind turbines in Belgium. 

Off-site PPA: As it is understood, the RE power plant location is not at the site of the buyer. The power provider agrees to transport power physically or through grids or through financially settled transactions. This agreement makes sense to companies that have data centers and would need a large amount of electricity. Amazon has signed 44 off-site PPAs totaling 6.2GW during its recent clean power buying spree. 

Sleeved PPA: In a broader sense, this is an off-site PPA. The energy provider offers additional services such as roping other electricity producers to its portfolio, selling surplus quantities, balancing group management, forecasts, green certificates, and accountability in various risk factors. 

Virtual PPAs (or Synthetic PPAs) 

Virtual PPAs (VPPAs) or Synthetic Power Purchase Agreements (also: SPPAs) are financial contracts of difference. It is not about a physical delivery of energy. They need a liquid electricity market, either through ISO or RTO. Ideally, this would suit customers from multiple sites, who are not tied to a particular energy market. Considered as more flexible, VPPAs are akin to a financial hedge and have no dispatch costs and no limits on load points. 

Without direct actual conveyance between the contracting parties (like an on-site PPA), and with no immediate adjusting sheet interface between them (like an off-site PPA), VPPAs are also considered cost-effective. Virtual PPAs continue to dominate the U.S. market, with 12GW worth of deals. 

Portfolio PPA 

This is simply a master purchase agreement into one big PPA. For a large corporate buyer, this makes sense. A corporation that is scaling up can have a portfolio PPA, that will help them purchase RE from a host of projects in multiple regions from one developer. They can agree upon a “confirm structure,” or‌ use per need agreement with a developer. As there is an inherent flexibility in this model, it can provide benefits for both parties as well. 

You can also ‌look at our upcoming events for a deeper dive into the hottest topics in European Energy Industry.  

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