A Power Purchase Agreement (PPA) is a bilateral contract that allows buyers to purchase energy and Renewable Energy Certificates (REC) from a renewable energy supplier. Agreements can be flexible in order to meet the energy buyer’s needs. For example: deals can be purely financial or include physical energy delivery; EACs can be bundled to the PPA price; and length, security package, penalties and distribution can all be negotiated by the parties.
What are the types of PPA?
There are several different types of Power Purchase Agreements (PPAs). Among the most common types of PPA are the following:
- On-site PPA: in this case the power generation system – solar or wind, for example – is owned by the power generation company but is located on the customer’s property; the size of the plant depends on the customer’s energy use profile. The energy producer and energy user must, therefore, be physically located in the same place. Since energy is not supplied via the grid, there are no dispatch costs. This arrangement is perfect for companies that want to self-produce renewable energy but don’t want to invest in infrastructure, preferring to externalize the risks and management of the project to specialized firms;
- Off-site PPA: if the energy user doesn’t have the possibility to build energy generating infrastructure on their premises, they can go with an off-site PPA. This is simply a financial contract for the purchase of renewable energy. In this case, the contract provides for the balanced purchase of a fixed amount of electricity and the grid operator continues to receive dispatch fees, since the energy is delivered from producer to customer via the public grid. With this arrangement, the energy supplier can situate its production facilities in locations with optimal characteristics – say a well-exposed sunny hill – or can use already existing infrastructure, resulting in greater flexibility;
- Sleeved PPA: these are off-site PPAs but include an intermediary. An energy services provider takes on various responsibilities – including purchasing and delivering energy – and therefore plays a role as interface between energy producer and energy consumer. If the renewable energy purchased by the intermediary isn’t enough to meet the customer’s demands, the intermediary is responsible for supplying additional energy.
What are the advantages of PPA?
There are multiple benefits to entering into a PPA, including:
- Direct contract with renewable power project operators;
- Flexibility on agreement terms and types;
- Transparency of energy costs and ability to plan for the long-term;
- Contribution to sustainability targets;
- Environmental commitment to customers and key stakeholders;
- Additionality: through a PPA customers contribute to the construction of new infrastructure and thus to the development of new renewable energy sources;
- Risk allocation reflected in the deal.