POWER PURCHASE AGREEMENTS
Offtaker agreements are an important instrument in large energy infrastructure projects. For Solar PV these take the form of Power Purchase Agreements (PPAs)
A PPA is a contractual arrangement between a power plant owner (seller) and a consumer (buyer) for the procurement of power and its attributes. The parties agree the amount of electricity for a predetermined price over a specific period. The agreement sets out the rights and obligations of the buyer and seller over a time horizon of typically 5, 10, 15, 20 and 25 years. PPAs are often used to provide certainty in the electricity market and is an allocation of risks and benefits between a buyer and seller.
PPAs are commonly used by companies to purchase green energy and are becoming increasingly popular as the demand for renewable energy grows and the need to reduce emissions rises.
Why choose a PPA?
There are many reasons to choose a PPA. The reasons differ depending on whether you are a buyer or seller.
As a buyer, a PPA will often lie within an organisation’s energy procurement strategy. Some factors to consider when deciding whether a PPA contract is the right procurement strategy are:
The aims of the organisation (carbon reduction, financial hedging, energy security)
Technology mix (wind, hydro, solar, solar plus BESS etc.)
Term of the contract
Type of PPA structure (physical, virtual, financial) &
Amount of energy (In kWh and as a percentage of your business energy consumption)
As a seller, a PPA structure may help to secure funding, or lower the cost of project finance especially where the counterparty is well financially rated and looking for a long term.
What are the types of PPA?
There are three main types of PPA Agreements namely Physical, Virtual and Physical Power Purchase Agreements (PPAs) involve the direct purchase of electricity from a renewable energy generator, such as a solar or wind farm. The customer agrees to purchase a specific amount of electricity from the generator over a specific period of time, at a predetermined price. This agreement helps the generator to secure their income and helps the customer to meet their renewable energy goals.
Virtual Power Purchase Agreements (VPPAs) are similar to physical PPAs but involve no physical exchange of electricity. Instead, the customer agrees to pay an agreed-upon amount for the renewable energy generated by the generator, but the generator may sell the electricity to a different customer or on the open market. This agreement helps the customer to meet their renewable energy goals without having to build and maintain their own renewable energy system.
Financial Power Purchase Agreements (FPPAs) are agreements between the customer and a third-party financial institution that allows the customer to purchase renewable energy at a fixed price over a set period of time. The customer agrees to purchase a specific amount of electricity at the predetermined price and the financial institution takes on the risk of any changes in the price of electricity. FPPAs help customers to budget more accurately and reduce the risk of changing energy prices.
In the U.S. power purchase market, PPAs are abundant and are used by a variety of well-known companies to procure their green energy. Companies such as Facebook, Google, Apple and Microsoft have all used PPAs to purchase renewable energy, and these companies are leading the way in the trend of transitioning to green energy. In the USA, PPAs are often structured as Virtual Power Purchase Agreements (VPPAs) which provide the energy consumer with the option to purchase renewable energy credits (RECs). This allows companies to purchase green energy from sources outside of their local electricity grid, ensuring that their energy consumption is in line with their sustainability goals.
POPULARITY IS INCREASING
PPAs are becoming increasingly popular as the demand for renewable energy grows and the need to reduce emissions intensifies. Companies have taken advantage of PPAs to procure their green energy, leading the way in transitioning to green energy.
Additionally, countries have implemented PPA programs to facilitate the deployment of renewable energy projects and reduce their dependence on fossil fuels. As the trend towards green energy continues, PPAs will remain an important tool for companies and investors looking to procure and invest in renewable energy.
As a final mention there is a broad equivalent for the green gas (biomethane) market with a Gas Power Agreement or GPA.