What is a Power Purchase Agreement?
A Power Purchase Agreement (PPA) is a contractual agreement between a company (the buyer) and a producer of energy, often a producer of renewable energy through solar or wind farms (the seller). This agreement lays down conditions for example the volume, price and how certain risks such as imbalance are handled. An important part of the PPA is the intervention of a balance responsible party. This party plays a crucial role in balancing energy supply and demand and in ensuring the stability and reliability of the energy network. The balance responsible party is also the link between the producer and consumer. PPAs are often long-term agreements, which reduce risks of fluctuations in electricity markets by ensuring a predictable flow of energy. A PPA provides a stable and predictable revenue stream for electricity producers, which can be essential for financing and subsidising large-scale power projects. For consumers, it offers a guaranteed supply of green energy, which can contribute to sustainability goals. For electricity traders, a PPA can be of interest through smart buying and selling.
PPA's, for whom?
How PPA's facilitate development for wind- and solar parks:
The benefits for wind parks
- Financial security: Long-term price and volume agreements, crucial for investments and subsidies.
- Risk management: Manages price and volume risks, increases stability of wind farm projects.
- Market access: Guarantees market outlet for generated electricity, especially for new projects.
The benefits for solar parks
- Stability in income: a predictable income stream, essential for financing and future expansions.
- Insurance of sales: guaranteed sales of generated solar energy in a competitive market.
- Risk reduction: hedging operational risks, by mitigating seasonal variations and weather impacts,
Interested? Have a conversation with us!
More about E-world
E-world energy & water is where the European energy industry comes together in Essen. More than a fifth of the exhibiting companies are based abroad.
Come to E-world from 20 to 22 February and meet our team of experts specialising in Asset Optimisation & Trading, Origination & Structuring and Business to Business. They are ready to share their knowledge and insights with you.
What is the difference between a merchant and a corporate PPA?
We distinguish between several types of PPAs. Below we highlight two of them.
In a Merchant PPA, the price for the generated power is established by price developments on the market during the term of the PPA. Here, the generator does not have 100% certainty about its final remuneration. The buyer remunerates the power supplied, for example, at a Day Ahead index, which can also be an unweighted average over a certain period. The advantage for both the customer and the producer is that the price represents a realistic value. A disadvantage is that there is no certainty about income or expenditure in advance. In such a construction, however, there is the possibility of insuring (part of) profile and imbalance risks. For this, a premium is charged by the party assuming this risk.
In a Corporate PPA, the generator enters into a PPA directly with a final consumer of electricity, e.g. an industrial customer or data centre. The customer is supplied with the produced renewable power. The generator’s balance sheet responsible party will supply this power to the customer’s balance sheet responsible party on a daily basis, based on agreements. This can, for example, be based on expected production, realised production and flat production. In the PPA, the customer and producer will agree on the remuneration the producer will receive from the customer for the power supplied and the GvOs. Such a structure may be interesting for generation assets that do not receive subsidies. Price certainty can be obtained for customers for a longer period of time. In a Corporate PPA, electricity is thus purchased directly by an end user with the intervention of a balance responsible party. This need not be the fully produced electricity. A generator can enter into several PPAs for part of its production.