POWER PURCHASE AGREEMENTS
What is a PPA, and what are the main benefits?
A PPA (Power Purchase Agreement) is a long-term agreement between a renewable developer and a consumer for the purchase of energy. The Iberdrola group has extensive experience in this sector and has entered into contracts of this type in countries including the United States, United Kingdom, Spain, Mexico and Australia, and it now has agreements with companies such as Amazon, Apple, Facebook and Nike, among others.
WHAT IS A PPA?
A PPA is a long-term agreement to purchase clean energy from a specific asset at a predetermined price between a renewable developer and a consumer — generally a company requiring large amounts of electricity — or between a developer and a supplier who then resells the energy. The signing of a PPA can be understood as the sale of a project and its environmental attributes (Guarantees of Origin): it is a commitment that allows a renewable developer to make an investment decision using the criteria of profitability versus risk and/or achieve the funding necessary to execute the project.
According to the latest Corporate Energy Market Outlook
External link, opens in new window. by BloombergNEF, companies around the world purchased a record amount of clean energy through PPAs in 2020. In total, 23.7 gigawatts (GW) of renewable energy contracts were signed by more than 130 companies in sectors ranging from oil and gas to major technologies, despite the COVID-19 pandemic. Underpinning the market is surging stakeholder interest in corporate sustainability and expanding access to clean energy globally.
Of this amount, 11.9 GW were signed in the United States, 1.5 GW in Latin America and 7.2 GW were signed in Europe, the Middle East and Africa (EMEA), almost tripling the number of PPAs in the latter area since 2019. According to BNEF, in Spain, companies announced agreements to purchase no less than 4.2 GW of clean energy — as opposed to 300 MW in 2019 —, which is possible due to the country's natural resources and a group of experienced developers who are generating power at some of Europe's most competitive prices for solar and wind projects
IBERDROLA, SPEARHEADING PPA
Iberdrola is already extremely experienced in the PPA area, having started to operate in this sector more than a decade ago in the United States where it has entered into agreements with major companies including Apple, Amazon, Nike and Facebook, for which it produces green energy at plants such as Montague Wind and Gala Solar, both in Oregon.
In Spain, the group has pioneered this type of agreement with projects with companies in different sectors: banking, telecommunications (Vodafone and Orange), breweries (Heineken), sports distribution and brands, and, among the most recent, an agreement with pharmaceutical company Bayer, which Iberdrola will supply with 100 % renewable energy starting in 2022 and for ten years with the energy it will generate at the Francisco Pizarro photovoltaic plant, the largest currently planned for Europe.
Iberdrola also manages these types of agreements in markets including the United Kingdom, Mexico, Brazil and Australia from onshore and photovoltaic wind farms.
TYPES OF PPA
There are several types of PPA depending on where the energy is generated:
- An On-site PPA is a contract for the supply of electricity from an ad hoc photovoltaic plant located on the customer's property and connected to its internal network. The renewable developer makes the investment and designs, installs, operates and maintains the plant. The energy generated by the solar panels is energy that the customer is no longer demanding from the grid, so the developer offers the customer this energy at a more competitive price.
- An Off-site PPA is a contract associated with a utility-scale wind farm or photovoltaic plant connected to the transmission or distribution network of the country's electricity system to take energy from its point of origin to the consumption point.
OFF-SITE PPAs ON THE POINT OF DELIVERY OF THE ENERGY
Physical PPA
The developer sells the renewable energy to an end customer through an energy retailer, which supplies the energy from the renewable asset. Any shortfall is supplied from the retailer's generation portfolio. At the end of the month, the customer receives a single bill for all of its consumption, whether from the renewable installation under the PPA or at the spot price.
Virtual PPA
The customer deals directly with a renewable developer to agree the price of the energy (PPA price). In addition, it buys electricity from its preferred energy retailer. At the end of the month, the energy retailer sends the customer the bill for its physical consumption of energy. It also receives an itemised breakdown from the developer showing the result of the adjustment for the difference between the spot price and the agreed PPA price. Additionally, the developer will transfer the guarantees of origin generated by the installation to the end customer.
Sleeved PPA
In markets where the renewable developer does not have a retailing licence and the customer wants a physical PPA, an agreement with a local retailer can be reached to transfer the conditions of the PPA signed between the client and the renewable developer to the customer.
OFF-SITE PPAs ON HOW THE ENERGY IS DELIVERED
As-generated PPA
The customer consumes the gross generation from the plant. This is the most competitive product when it comes to price; however, it is also the riskiest product for the customer as generation from renewable sources is not predictable. It is only recommended for the most sophisticated customers.
Baseload PPA
The renewable developer converts the gross generation from the plant into a baseload. This is the most common product among customers, as there is an interesting balance between cost and risk. However, not all developers are able to offer this type of PPA.
As-consumed PPA
The renewable developer converts the gross generation into a curve which faithfully mirrors the customer consumption curve. This is the most common product among non-expert customers as this is the product in which the developer gives most added value to the customer. Only companies with a large generation portfolio can compete in this type of PPA.
MAIN BENEFITS OF PPA
The biggest benefits for the consumer are:
- A clean supply of energy which can be traced from a specific asset.
- They generate additionality: Signing a PPA makes it feasible to invest in renewable assets, thereby reducing the amount of power generated from polluting sources.
- Possibility of branding the renewable asset.
- Competitively priced energy (significant discounts on current and future energy prices).
- Electricity at a stable and predictable price.
- Each product is adapted to the client's needs.
As for the benefits of PPAs for developers, we can mention:
- They allow them to invest in new assets because of the long-term revenue certainty they provide.
- They allow investment decisions to be made based on the criteria of profitability versus risk.
- They make the project bankable.
- They establish long-term relationships with end clients.
- They are an alternative means of investment in renewable assets, in addition to participate in auctions or to invest merchant.
