A power purchase agreement (PPA) is a long-term supply contract between an electricity generating company (the seller) and an electricity purchasing business (the buyer). If the PPA is referred to as a renewable or green PPA, the power is generated from renewable energy sources like hydro, solar or wind power with their associated environmental benefits. Renewable or green PPAs enable developers to secure financing for new renewables projects and allow buyers to secure a long-term fixed electricity price while significantly reducing their CO2 emissions.
What is a power purchase agreement (PPA)?
Can PPAs be used for both on-site and off-site projects?
The power generating plant may be located on-site at the buyers' location or which is much more likely, off-site with the electricity being supplied to the buyer via the power grid. However, in many cases there is a regional connection between the place where the electricity is generated and the buyers location. This regional connection may not be driven by technical or commercial considerations but is intended to support local supply chains and areas and/or simply set up for marketing purposes.
What is the difference between working with a PPA broker and signing with a renewable energy company like innogy?
innogy will build, maintain and operate the renewable energy project that will supply your electricity. Brokers on the other hand frequently just the link or act as a ‘matchmaker’ between a renewable energy project or company (with no dedicated PPA team) and the buyer. It should also be noted that innogy usually does not sell the majority share in a project after it is built in order to just profit from the construction. We build, operate and maintain most of our projects for their entire life span. This reduces the points of contacts for the buyer and helps raise acceptance of innogy’s projects locally.
What is the usual contract duration for a power purchase agreement?
The average duration of a PPA is usually somewhere between 8 and 20 years. 20 years is currently the minimum expected lifetime of many renewable energy projects. However, other contract durations are also possible. For example, there are renewable assets for which subsidies will run out after a certain period. These are frequently in a good technical condition and ready to operate far beyond their minimum expected lifetime. When the subsidies for a particular project run out, this may present the perfect opportunity for entering into a PPA. innogy starts with a customer intake to check the feasibility of the buyer’s preferred off-taker structure.
Which elements is a PPA usually made up of?
The PPA (i.e. the contract) defines all the commercial terms for the sale of electricity from renewable sources between the two parties, including when the project will commence commercial operation, schedule for delivery of power, who manages forecasting and imbalance, penalties for under-supply, payment terms and termination.
Who are PPA off-takers?
Commercial, industrial and institutional buyers first started using PPAs around 2008. Driven by the unprecedented fall of costs for constructing renewable power projects over the last decade, in combination with a growing demand for corporate sustainability among investors and consumers, renewables have become an attractive source of energy around the globe. PPA structures can already be found in 75 countries. Europe and North America continue to account for the bulk of corporate sourcing. A huge number of companies do not just procure green electricity in the country where they are headquartered but also for other operations around the globe. Active corporate sourcing of green electricity reached 465 terawatt hours (TWh) in 2017, approximately 3.5% of the total power demand in the commercial & industrial sectors. In terms of volume, most of the green electricity was consumed in the materials sector (165 TWh), which includes mining; pulp and paper and chemicals (see figure ES.2). The highest percentages of green electricity are consumed in the financial (24%) and information technology (12%) sectors (all data by Irena 2017).
What is the difference between standard and virtual PPAs?
Standard PPAs are agreements to supply electricity generated at a particular project directly to the buyer. Here, the electricity is supplied by the seller and transmitted through the grid. Seller and buyer must be located within the same power market to allow for physical delivery of power. ‘Virtual’ or ‘synthetic’ PPAs do not involve physical delivery of electricity. There are three common options for virtual PPAs: contract-for-differences (CfDs) options and commodity hedges. The most common ones are CfD contracts. In CfD contract setups, the power from the renewables project is sold directly to the open market. The buyer then purchases electricity on the market. If the market price rises above the strike price of the contract, the seller pays the difference to the buyer. Inversely, the buyer compensates the project if market power prices fall below that limit. Both types, direct and synthetic PPAs, include the financial and environmental benefits of the associated projects.
What are the benefits of signing PPAs for a renewables developer?
The PPA is often regarded as a central and crucial contract in the development of renewable power projects. Renewable power projects need fewer and fewer subsidies and have become competitive in the markets. To ensure good bankability and de-risk the high investments in the early stages of a project, a long-term contract (like a PPA) that secures the off-take of the power is key. A PPA defines the revenue terms for the project and credit quality, it is often key to obtaining non-recourse project financing.