A power purchase agreement (PPA) is a contract between an electricity generator (provider) and a power purchaser (buyer, typically government or large power buyer). Contractual terms vary from anywhere between 5 and 20 years, during which time the power purchaser buys energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets. The seller under the PPA is typically an independent power producer (usually renewable power), or “IPP.”
Several large businesses are now entering Corporate PPA’s with renewable energy projects as a means of achieving price certainty and savings on future energy costs. This price usually is based on a long-term fixed component (7 to 10 years) for the length of the contract with a variable component as well. The variable component is a risk mechanism which runs every 2 to 3 years. This ensures that the variable component is closely linked to wholesale price movements.
Corporate PPA options were typically for larger users with usage in excess of 50 GWh per annum, however, this has now changed and there are options for companies with much lower usage or buying groups. The sites can be in any state of the National Electricity Market (NEM).
Due to price volatility companies are seeking to reduce their electricity costs, hedge against rising wholesale markets or, in some cases, meet their national or global sustainability targets. Corporate PPA’s offers the opportunity to hedge and thereby manage long term pricing risk.
T&O offer consulting services in this area. We can assist with finding the right solution for your business.
There a number of PPA structures;
- Virtual PPA – Corporate Buys all electricity from grid via a short-term contract with retailer for a fixed price. Financial hedge (CfD) for portion of electricity and LGC’s from a specific renewable energy project. Electricity generated is exported directly to the grid. No electricity is purchased directly from the renewable energy project.
- Modified Virtual PPA – Corporate buys all electricity from the grid via a short-term contract with a retailer (with a portion at a fixed price and a portion at the spot price.) Financial hedge (CfD) for a portion of electricity & LGC’s from a specific renewable energy project. Electricity generated is exported directly to the grid. No electricity is purchased directly from the renewable energy project.
- Sleeved PPA – Corporate buys electricity & LGC’s from a specific renewable energy project via a retailer under long-term contract for a specified load. Retailer hedges the corporate’s load with the renewable energy project for the same contract term as the corporate’s retail contract. No electricity is purchased directly from the renewable energy project.
- Buy LGC’s only – Corporate buys LGC’s only directly from a
- renewable energy project. The corporate can then transfer, retire or sell LGC’s as required. No electricity is purchased directly from the renewable energy project.
- Behind the meter- Renewable energy project installed onsite at Corporate’s premises. Corporate agrees to purchase all or a portion of electricity generated by project. Any demand unmet by the onsite project is serviced via a separate retail contract. Direct electricity supply via private infrastructure.