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Power Purchase Agreement

PPA Trade

A Power Purchase Agreement (PPA) is a long-term electricity supply contract between two parties, typically between an electricity producer and a customer (electricity consumer or seller). The PPA specifies in detail all the terms of the activity related to electricity – the amount of electricity to be supplied, negotiated prices, accounting and penalties for non-compliance.

Due to the fact that it is a bilateral agreement, the PPA agreement may take various forms and be adapted to the needs of each party to the agreement. Electricity can be delivered physically or on balance. Due to their ability to reduce the risk related to market prices, PPAs are used in particular by large electricity consumers and in the case of planned, larger investments in the construction or further operation of power plants using renewable energy. Unlike in the US, electricity purchase contracts are not yet widespread in Europe.

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PPAs and renewable energy financing

Electricity Purchase Agreements (PPAs) can finance the construction (i.e. investment costs) and operation (i.e. operating costs) of power plants that generate electricity from renewable energy sources. They are used in particular where electricity suppliers have legal requirements to supply electricity from renewable sources, such as the United States. PPAs can also be useful in countries where the development of renewable energy is not yet a political or national goal.

Who concludes the PPA?

Operators of renewable energy installations conclude PPAs both bilaterally with the recipient company (“corporate PPAs” – “Corporate PPA”) and with the electricity distributor that purchases the electricity produced (“commercial PPAs” – “Merchant PPAs” “). The latter either places electricity on a power exchange or supplies electricity to a specific electricity consumer, making the contract a “corporate PPA”.

Many multinational companies already purchase a stake in electricity consumption under PPAs or would like to increase their share of electricity purchases under PPAs. In addition to stable electricity supply conditions, the environmental aspect also plays an important role.

Especially for plant operators with high investment and low operating costs (e.g. photovoltaics and wind turbines), PPAs are a good way to reduce the risk of fluctuating electricity prices. The more secure remuneration for electricity increases not only the trust of energy companies, but also of partners financing the profitability of the installation.

Benefits of PPAs

Long-term price stability, the possibility of financing investments in new generation capacity or reducing the risks associated with the sale and purchase of electricity are obvious advantages of PPAs. This offers customers the opportunity to make their brand more sustainable and greener.

In addition, the freedom to design contracts gives some flexibility to reflect the individual preferences of power plant operators and electricity consumers. This also applies to pricing: PPAs can be at fixed prices or allow a greater share of risk and market opportunities.

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