Power Purchase Agreements (PPAs): advantages in the face of rising energy prices

PPA: definition

A PPA stands for Power Purchase Agreement. It’s an electricity supply contract signed directly between a producer (seller) and a consumer (buyer). Hence the term corporate PPA (or CPPA). Electricity suppliers can also sign PPA contracts with renewable producers. These are known as utility PPAs (or UPPAs).

In their most traditional sense, PPAs involve the supply of green electricity. The electricity supplied therefore comes from renewable production sources, mainly solar photovoltaic, onshore wind and offshore wind.

Brownfield, greenfield, physical on-site, off-site, virtual… A very wide choice of PPAs is available.

In reality, the generic term “PPA” covers a wide range of situations, all of which offer a choice to customers opting for this type of contract.

Firstly, the contract can be based on :

• On an existing renewable generation asset (referred to as a PPA brownfield). In this case, the asset is usually a renewable production facility that no longer benefits from public support. For example, this could be an onshore wind farm that has benefited from a government feed-in tariff for 15 years, and is now entering its 16th year of production.
• On an asset under development and therefore not yet producing renewable electricity (referred to as a PPA greenfield). In this case, signing a long-term PPA guarantees the producer’s income, which can help secure the project’s financing.

Then the contract can be :

• A “physical” PPA. In this case, the contracted volumes are integrated into the customer’s consumption. For example, a company may sign a PPA for a volume representing 15% of its annual electricity consumption.

More precisely, we then speak of physical on-site Power Purchase Agreement “when the generating asset is directly connected to the consumer (e.g. a photovoltaic plant on a company site). But this situation is quite rare. More often, the term “off-site physical off-site physical Power Purchase Agreement “when the production asset is connected to the electricity transmission or distribution network.

• A so-called “virtual” (or “synthetic”) PPA. In this case, the consumer agrees to pay the difference between the contracted price and the market price of electricity. In reality, this is a financial product.

There are two main options for the volumes contracted under a Power Purchase Agreement:

• A fixed volume of electricity. The consumer therefore receives a pre-determined volume (e.g. 200 MWh/year).
• A percentage of the electricity produced by the renewable asset. In this case, the consumer will not receive the same quantity of electricity every day, but will vary according to the performance of the generating asset. This is known as a “pay-as-produced” clause.

Finally, two major price options are available:

• A fixed price negotiated between seller and buyer, which may be indexed to a parameter defined in the contractual clauses (the inflation rate, for example). This is the most common case.
• A price based on the market price of electricity. This is a rare scenario, as it reduces the main advantage of PPPs: the predictability of electricity prices over time.

An increasingly dynamic market

In all, 272 contracts have been signed in Europe for 2023, representing an average volume of almost 60 MW per contract.

France is Europe’s 7th largest market, with a volume of 640 MW in 2023, far behind Spain (4.7 GW), Germany (3.7 GW) and Italy (1.1 GW). Nevertheless, a growing number of electricity consumers are showing increasing interest in this type of contract.

Above all, the Power Purchase Agreement market is set to grow strongly in the coming years. As part of the reform of the European electricity markets, the European Commission has asked all member states to encourage the signing of PPA contracts by removing any legal and administrative obstacles. The European Commission also recommended the introduction of public guarantees to encourage the development of this type of contract, which France has done.

In November 2022, BPI France launched a guarantee fund for Power Purchase Agreement contracts in France. The aim is to financially cover the contract by guaranteeing the risk of default. On October 11, 2023, BPI France announced the signing of the first contract to benefit from this guarantee. This was a Power Purchase Agreement signed between the renewable energy developer Arkolia and the buyer Bonduelle for the supply of 12 GWh/year of electricity for 20 years.

Why is signing a Power Purchase Agreement worthwhile?

The advantage of PPA contracts is that they offer both parties long-term visibility on the price of electricity.

Let’s take the example of an industrial customer. This customer usually knows his electricity consumption, and in particular his consumption “heel”, i.e. the minimum consumption level below which he never falls. As a result, they can make a long-term commitment to supply part of this “heel”.

Logically, the popularity of Power Purchase Agreements is directly linked to the level of wholesale electricity prices. When prices are low, it is more difficult for renewable energy developers to offer a competitive price, while customers are more reluctant to enter into long-term contracts.

Conversely,soaring electricity prices have created a real craze among buyers, who have flocked to this type of contract. Between September 2021 and April 2023, wholesale electricity prices remained well above €100/MWh, compared with an average of less than €50/MWh over the previous ten years.

But above and beyond the current level of wholesale prices, PPPs above all enable you to protect your electricity consumption volume against future wholesale price rises, while opting for a renewable electricity supply.