Green PPAs: Decarbonising businesses with energy from renewable sources

PPAs are long-term power-purchase agreements that large consumers conclude directly with the operators of the plants that are supplying the power. These are called green PPAs if the electricity concerned is generated from renewable sources of energy. Long-term power-supply contracts are increasingly becoming an interesting option for both producers of renewable types of energy and businesses with a desire to decarbonise their production and consequently contribute to climate protection.

INHALT:

This article is based on the PPA dossier published by ContextCrew Neue Energie, a specialist information provider: https://www.contextcrew.de/geschaeftsmodell-power-purchase-agreement-ppa-potenzial-zum-megatrend/

Green PPAs are green power-purchase agreements that regulate the supply or feed-in of specified quantities of green power at fixed prices over defined periods of time. PPAs are generally concluded over the medium to long term, and may cover between 10 and 25 years. They govern how the consumer purchases its power directly from the generator. PPAs for electricity from renewable sources of energy provide operators of solar, wind, biomass and hydropower plants with stable and calculable revenues, which will be particularly useful once subsidies under the Erneuerbare-Energien-Gesetz (EEG – Renewable Energies Act) fall away.

The long-term commitment makes it possible for large consumers to protect themselves against fluctuations in electricity rates and also reduce the carbon footprint on their corporate balance sheets.

Bilateral contracts have become increasingly important as an innovative marketing tool for renewable energy (RE) over recent years. The PPA business model has already become fully established internationally, especially where wind- and solar-energy projects are concerned and particularly in Scandinavia, the USA and the UK. Software and hardware companies like Google, Meta and Microsoft have already signed power-purchase agreements with plants that generate energy from renewable sources in Europe. The demand for green PPAs is also growing in Germany.

Green PPAs offer many benefits for businesses, renewable energy projects and the environment. They constitute an innovative business model that enables large-scale consumers to purchase power over a long term from renewable sources like wind farms and photovoltaic plants. The agreements allow companies to decarbonise their business activities and become more climate-friendly. From a commercial perspective, PPAs permit buyers to protect themselves against future increases in electricity rates as well as to cut emissions-trading costs.

Besides agreeing to protect themselves from rising costs, the parties concluding these contracts usually also agree to the provision of certificates of origin for the green power generated. The procurement of certificates of origin as a ‘green’ marketing tool represents a not insignificant motivation for the purchasing companies to conclude power purchase agreements.

For generators, the green contracts offer an alternative to the traditional feed-in payments, particularly for plants that are no longer being supported by payments via the EEG PPAs for many ‘old plants‘ are becoming lucrative now that the 20-year EEG grants are coming to an end. In the onshore wind energy sector alone, wind turbines with a capacity of around 16.3 gigawatts will no longer be eligible for state subsidies between 2020 and 2025.

Long-term supply contracts also provide planning security and make it easier to finance new projects. PPAs consequently constitute one way of financing the generation of energy from renewable sources. They’re contributing to making green power more widespread and are facilitating the energy transition by expanding wind power and other renewable sources of energy. In spite of such uncertainties as fluctuating market prices, which, at times, may also result in cheaper energy costs, green PPAs represent a commercially attractive option for companies and plant operators in general – and the environment in particular.

A variety of different types of PPAs are available depending on the scope of application and the contracting parties:

• In the case of Physical PPAs, for instance – electricity actually flows from generators to customers using physical on-site transmission systems. These types of PPA are often utilised by companies that wish to work directly with a provider of renewable energies to help fulfil their specific electricity requirements. It obviously helps if the generator and consumer are located close to each other so that transmission losses can be minimised.

• Financial PPAs, also called synthetic or virtual PPAs are agreements not about the physical transmission of power but about financial arrangements aimed at balancing fluctuations in prices. Power is therefore not transmitted directly to consumers but supplied to public grids, for instance. This model is particularly suitable for companies that want to promote the use of energy from renewable sources without having to invest directly in the corresponding infrastructure or purchase power from specific plants.

• In the case of Corporate PPAs (CPPAs) the buyers are large industrial companies. These types of PPA allow companies to meet their energy needs directly from sources of renewable energy while fulfilling their sustainability goals at the same time. Corporate PPAs may be structured both as physical and synthetic agreements.

• Utility PPAs by contrast constitute contracts between energy suppliers and generators of energy from renewable sources. The electricity resold to end consumers therefore usually no longer comes (at least to some extent) from the interconnected grid, but from an often regional plant operator. These types of PPA are used to supply energy suppliers with energy from renewable sources, which is then resold to end customers. Utility PPAs constitute a particularly common contract model and are an important source of financing and expansion for renewable energy projects.

Depending on the contracting parties’ needs and goals, it’s also possible to conclude individual types of PPA that are tailored to specific requirements and market conditions.

Several steps need be taken before it’s possible to structure and conclude PPAs: One aspect to consider is the thorough analysis of the market in regard to supply and demand along with the corresponding market conditions and development trends. It is, of course, also essential for two matching contracting parties to find each other. This needs to be followed by a review of technical and commercial feasibility after which the contract terms need to be negotiated and the final contract document drawn up.

The terms of the green PPA will then regulate – in a legally binding fashion, of course – at least the following points:

• Who are the contracting parties?
• What product does the PPA concern (at least green electricity, usually more specifically from which source and, if applicable, very specifically from which plant)?
• How much power will be delivered over what period of time?
• At what price will the electricity be fed into the grid and at what terms of payment?
• What are the liability and warranty conditions?
• What are the rules for providing notice of termination?

A range of additional points may also be relevant depending on the situation. These may frequently also include the technical quality of the electricity itself, for instance, and the corresponding transmission technologies, how risks and market changes will be dealt with and what will happen in the event of disruptions or outages.

Author: Stefan Heimann