Power Purchase Agreement: Secure green electricity in the long term

Definition: What are Power Purchase Agreements?

Power Purchase Agreements, or PPAs for short, are electricity contracts between electricity producers on the one hand and electricity consumers or electricity traders on the other. The electricity purchase agreement between consumer and trader is often of a long-term nature.

The PPAs are often explicitly linked to a specific wind or solar farm from which the generated energy must come. To prove this origin, the buyer of the green electricity purchases the corresponding certificates in addition to the actual electricity supply. Now that the PPA has long been established in the USA and Scandinavia, it is also becoming an increasingly widespread instrument for marketing renewable energies in this country. Large corporations such as Deutsche Bahn, the online mail order company Amazon or the materials manufacturer Covestro were the pioneers in Germany and their example is catching on.

Why PPAs? Protect the environment & reduce market price risks

Depending on the regulation and market environment, there can be different situations in which PPAs are an advantageous form of financing. Anyone who decides on a power purchase agreement based on a new wind or solar park provides direct support for the expansion of renewable energies and reduces the carbon footprint in the electricity sector. According to the EU Taxonomy Regulation, such a PPA is considered an ecological investment and is therefore relevant for non-financial reporting.

In addition, just Companies with high power consumption the possibility of long-term hedging against price increases. And these price increases are to be expected in view of some fundamental developments such as the coal phase-out or CO2 pricing.

Power Purchase Agreement as a win-win situation

The topic of power purchase agreements is currently also being fueled by the expiry of state subsidies for many old generation plants. From 2021, subsidies under the Renewable Energy Sources Act (EEG) will end for the first large plant parks. Their operators now need alternative sources of income for continued profitable operation, for example through direct supply contracts with electricity consumers. Many of these energy consumers, in turn, are excited about opportunities to achieve their ambitious sustainability goals. The energy suppliers handle the delivery and supplement the residual electricity quantities that do not come from the PPA.

What should be considered before entering into a PPA?

There are major differences in the specific design of PPAs, not only with regard to the underlying generation technology – wind or solar, new plants or legacy plants – but also in terms of pricing and the duration of the contracts.

A key question is which form of electricity delivery is agreed. There are roughly three variants:

• “as produced”: The customer receives exactly the amount of electricity that the plant in question has produced. He therefore also bears the risk of forecast deviations and the corresponding balancing energy costs.
• “as predicted”: The buyer receives exactly the amount of electricity that was usually forecast by the producer one day before delivery. This increases the ability to plan and shifts the balancing energy risk to the supplier. However, the customer is still confronted with the usual fluctuations in generation from renewable energies.
• As a band: The tape delivery avoids the problem of usual fluctuations in production. A constant amount of electricity is made available throughout the year. The PPA provider compensates for the differences between the actual renewable generation and the delivery quantity.

Last but not least, the question arises as to which term should be chosen for the PPA. Most PPA contracts have a relatively long term of 10 to 15 years. Especially with new plant PPAs, the providers need a long contract period in order to receive financing for their projects at all. However, significantly shorter periods of time are also agreed, for example for post-EEG solutions.

Strengthening Power Purchase Agreements

The conclusion of a PPA is usually still limited to a few countries and large companies within the European Union. Therefore, the EU Commission has announced that it wants to remove the existing administrative, technical and financial obstacles and thus promote the PPAs. The EU also wants to counteract the rising electricity prices.

In Germany, dena, the Association of German Chambers of Industry and Commerce (DIHK), and the climate protection companies have launched a market offensive for renewable energies. The initiative aims to strengthen business models for the direct purchase of green energy and is initially concentrating its activities on corporate green PPAs due to the large untapped market potential. PPAs are also explicitly mentioned in the coalition agreement of the new federal government as an instrument for accelerating the expansion of renewable energies.

This is one of the reasons why it can be expected that PPAs will no longer be considered an exotic special case in electricity procurement in the near future, but will instead become an important component of electricity procurement.