What is a Power Purchase Agreement (PPA)?
A Power Purchase Agreement (PPA) is a contract between two parties—a green electricity producer and a buyer, such as an electricity consumer or trader. A PPA includes all the terms and conditions of this agreement. These include the amount of electricity to be supplied, the negotiated price, who bears which risks, the required accounting procedures, and the penalties if the contract is not complied with. Since it is a bilateral agreement, a PPA can be tailored to the wishes of the parties involved. As a result, the supply contract can take many forms. Through a PPA, you can supply electricity directly or virtually. More on that later.
Typically, a PPA is a long-term agreement, such as a ten- or fifteen-year contract. This eliminates—at least in part—the risk of fluctuations in the electricity markets. This is particularly desirable for large, debt-financed projects. PPAs are also entered into to ensure the continued operation of renewable energy facilities once they no longer receive subsidies.
There has been a noticeable increase in the number of PPAs within the Netherlands. Examples include NS and KPN, which have entered into power purchase agreements for the supply of green electricity for their operations. Energy cooperatives and energy producers are also entering into PPAs.
Why enter into a PPA?
Depending on regulations and the energy market, various situations may arise in which PPAs offer a cost-effective and stable form of energy supply or purchase. Are you a developer or owner of a PV installation or wind farm? Then you need a party to purchase the electricity you generate. Or are you a large-scale consumer looking to receive green electricity at an attractive rate? In that case, you can choose to enter into an agreement with a renewable energy producer—with or without an intermediary that handles processes such as program responsibility.
Once a project has been financed, the financial institution involved will generally require that a PPA be entered into with a creditworthy buyer. Depending on the size of the wind farm and the duration of the SDE+ subsidy, the institution will impose certain conditions regarding the risks and the term of the PPA. For projects financed by the owner, there is complete freedom to tailor the power purchase agreement to the wishes of both parties.
Types of PPAs
The wide variety of contractual arrangements makes it difficult to clearly define the different types of PPAs. The most common power purchase agreements can be divided into two groups. On the one hand, we distinguish between them based on the buyer of the generated electricity (corporate versus merchant). On the other hand, we can classify them based on whether the electricity is delivered physically or virtually (physical versus virtual).
Who buys the electricity?
Operators of renewable energy facilities enter into PPAs with a (large) consumer—known as a Corporate PPA—or with an electricity trader who, in turn, resells the electricity produced—known as a Merchant PPA. This could also be a specific electricity consumer, in which case the contract becomes a “Corporate PPA” again. It is also possible to trade the electricity on the power exchange.
Corporate PPAs are gaining traction internationally. Companies like Google and Apple prefer to power their data centers with green energy in this way. This makes sense, as it guarantees them stable—and therefore predictable—electricity prices. And it boosts their eco-friendly and innovative image. In the Netherlands, a breakthrough is still a ways off: most wind farms are looking for a buyer for 10 to 15 years (the duration of the SDE+ subsidy). That is a very long-term purchase contract for a company. Nevertheless, one can expect the number of corporate PPAs to grow in the coming years thanks to rising interest among companies in green energy generated domestically.