Understanding the complex world of Power Purchase Agreements

Amazon, Google and Facebook signed Power Purchase Agreements amounting to 503 MW in Europe (Spain, Denmark and France respectively) last year. They are part of the growing 1.9GW worth of corporate renewable PPAs signed in Europe by 2020 first quarter. 

 

What are PPAs and what is their USP?

The power of Power Purchase Agreement (PPA) or contract is its long-term nature, wherein two parties – a power producer and a customer (who could be a trader, electricity distributor, supplier or a consumer) are working together anywhere between 5 or 20 years. With prices negotiated upfront, there is a better accountability and clarity in this bilateral agreement and is usually customized for specific requests.

Over 130 companies signed Clean energy PPAs in 2020, including tech companies, oil and gas groups and automakers. Together they have gained 23.7GW of renewable energy through various long-term agreements.

Even if electricity is supplied virtually (through a balancing sheet) or physically, PPAs help buyers and suppliers tide over market price risks that are linked with renewable energy plants. Wind energy is definitely more popular, accounting for 85% of corporate PPAs, while the rest 15% were for solar energy.

PPA’s allure for energy developers and Corporate 

Depending on regulation and the market environment, PPAs can be helpful, or binding for the parties involved. Some of the major advantages of a Power Purchase Agreement corporate consumers are:

  • Price lock-in 
  • Lesser dependency on market pricing fluctuations

As for power generators or energy project developers, PPAs offer them a guaranteed ROI on a long-term. PPAs become helpful for project developers to secure financing having a proven ROI.

Other than good business sense, many countries see Power Purchase Agreements (PPAs) to further investment and cover the operational costs of renewable energy plants. For corporates, it could feel like an early market investment opportunity that would reap benefits as the years go by. Plus they are gaining in on their sustainability targets.

Notable among big corporates – Amazon has pledged to source 100% renewable electricity by 2030, with an interim target of 80% by 2024. Google has been sourcing 100% renewable electricity for operations since 2017 and is now in the process of bringing its manufacturers and suppliers along for the transition.

Though PPAs are signed at fixed prices, it invites a larger participation for the electricity market as it can accommodate individual plant operators and electricity consumers. There is an added diplomatic twist as well. By agreeing to a specific supplier from a particular region, large companies or customers are forging long-term relationships with a particular region’s economy.

PPAs are complex

PPAs are lengthy, intricate and complex documents and are not without its disadvantages- the negotiation and future price developments that could end up being negative for one party involved. What clauses you agree to matter, a lot!

The aforementioned tech giants, for instance, and other names are contesting an alleged case of EU state’s ignorance on the deals struck.

The rapid advances in the wind and solar sector also lead to fluctuation in electricity quantities, which could lead a plant operator to having to purchase electricity externally to cater to the agreement or agreeing to financial or physical compensation.

Europe and a Surge in PPAs

Corporates sourcing of renewables is already taking place in over 11 countries in Europe and, as of 2018, corporations have actively sourced over 769 terawatt-hours (TWh) of renewable electricity globally. While Spain, Italy and the UK have secured favourable positions through their policy frameworks, Denmark and Sweden are getting their fair share of attention due to their lowest offer prices for solar, (€31/ MWh), and wind (€29/MWh), respectively.

Other than the global heavyweight mentioned in the beginning, the other companies that are making headlines are the Danish companies Danfoss and Ørsted. They have signed a 10-year fixed corporate power purchase agreement to boost their renewable energy quota. Other significant PPAs are of French industrial gas producer Air Liquide and Vattenfall for a 100GWh PPA. And that of the telecommunications operator Orange’s 20 year PPA with Total. Total has also inked a virtual PPA in Spain with AB InBev, to offset their load elsewhere.

While wind-rich nations such as the UK, Sweden and Norway have had successful PPAs, the strong variation in corporate renewable PPA between the European countries shows the diverse nature of legal and regulatory frameworks in the continent. America is braver by making renewable PPAs ‘commonplace’, by getting 16GW (four fifth of the global tally) worth of PPAs signed in 2019.

At Power Purchase Agreements 2021 virtual conference, we bring together experts from across power generation, distribution and financing landscapes to benchmark the best-practices to navigate the complex world of PPAs. Join the conversation with us!