What is a Power Purchase Agreement (PPA)?
A Power Purchase Agreement (PPA) is a long-term agreement to supply renewable business electricity over an agreed period - this period can be anywhere from as little as five years, to as much as fifteen years.
A PPA is essentially just an electricity and wind energy contract, whereby a certain amount of renewable energy is agreed in volumes and at prices that meet both the requirements of the generator and consumer.
Why do companies want PPAs?
Power Purchase Agreements are popular among businesses that are keen on reducing their environmental footprint and saving money on energy.
A company that signs a Power Purchase Agreement will pay less for their business energy as they are buying their energy directly from renewable energy generators, rather than going through an energy supplier.
What are the benefits of a PPA?
Price protection
Signing a PPA protects you from fluctuating energy prices, because the initial price you agree to pay extends throughout the entire length of your Power Purchase Agreement, meaning if the price goes up you carry on paying the same.
Business sustainability
Reducing your carbon footprint and running your company on renewable energy is always a good thing, and can help your business strive toward meeting its sustainability targets. PPAs often involve the giving of a Guarantee of Origin to the consumer, which is effectively a certificate of evidence that you have purchased a certain amount of renewable energy.
Help create a greener planet
A PPA for renewable energy or wind power will enable a new project to be built, generate more renewable capacity and help make the world a greener place!
Who are the parties involved in a PPA?
The two parties involved in a Power Purchase Agreement are the energy buyers and energy sellers.
Energy buyers are usually concerned with getting their energy from renewable sources to reach green energy goals, while also wanting to guarantee long-term peace of mind for their energy costs.
Energy sellers come under the following categories:
- Investment companies
- Independent electricity producers
- Renewable energy asset managers
- Energy companies building their renewable assets
- Infrastructure funds investing in renewables
I want to sell my energy, how does it work?
Of course, if you’re a generator of renewable energy, whether a dedicated one or simply a business with generation assets, you’re going to want to know how PPAs work for you, because without a PPA you won’t be able to earn money for the energy you export back to the grid.
If the amount of energy you generate is consistent you could benefit from fixed-price contracts that give you a regular monthly income, or you can opt for a “spill” contract which will pay you whenever you choose to export excess electricity.
PPA contracts align with government subsidy schemes such as the Contracts for Difference (CfD) scheme and the Smart Export Guarantee (SEG). CfDs aim to incentivise developers into investing in renewable energy generation by providing high upfront payment and protection from wholesale energy fluctuation. SEGs on the other hand pay small-scale energy generators for sending low-carbon electricity from solar, wind, micro-CHP, hydro or anaerobic digestion back to the grid.
How does a Power Purchase Agreement work?
In your Power Purchase Agreement, you need one of two things:
- A renewable project ready to be built with a pre-agreed connection to the grid.
- An existing project that needs refinancing.
Once the above requirements have been met, the following steps will be taken to achieve your PPA:
1. Implement or refinance your project with a PPA
2. Determine contract structure
3. Create an RFQ and reach out to buyers
4. Compare offers received
5. Negotiate terms
6. Sign contract
7. Manage your energy sales and risk throughout the PPA