What is a PPA

A PPA for its initials in English Power Purchase Agreement, is a long-term clean energy purchase agreement from a specific asset and a fixed price, for a specified volume and time horizon.

You can tell between a developer and a marketer or between a renewable developer and an end consumer, in this second case, usually large companies with significant electricity consumption.

Types of PPA, and which are the most typical that are being signed

PPAs can be classified in many ways, depending on whether or not physical energy is delivered, according to the generation matrix, depending on whether it is a fixed price or an OMIE with discount …

In this article we will focus on two:

Depending on the delivery point it can be physical or financial.

Physical, if the agreement unites the consumer in any way with renewable generation assets. In the event that the client is a marketer, it will have to nominate the energy, in case of being an industrial client it implies a supply contract for the same time as the PPA.

Financial, they are purely financial contracts, there is no physical delivery of energy. Therefore, in the event that the buyer is an end customer, the PPA is independent of the supply contract.

Depending on the generation matrix, profiling (solar wind) or base load.

In the base load the seller in the PPA is responsible for converting the generation profile of the park into a base load. The volume of the contract is destroyed homogeneously between all hours. In this case the generator assumes more risk linked to the price.

In the profiles, both wind and solar, the generation matrix determines the distribution of the volume of the PPA. The volume of the contract is distributed based on the production of the park. In this case the customer assumes more risk linked to the price.

What experience do we have in Spain with the PPAs?

Many are the PPA’s signed between generators and marketers, however, this situation is not analogous to the end consumer.

In Magnus we advise on the agreement of the first PPA that was signed with an industrial client in Spain, EDP and Pascual and since then we continue to advise on this issue.

Iberdrola began a photovoltaic megaproject in Badajoz in March, supported by a PPA with Kutxabank and Euskaltel.

Endesa is launching a PPA with BBVA.

The PPA’s have a long way to go, but given their complexity, they are in a very early phase in Spain.

What are the advantages for a Generator and an OffTaker to sign a PPA?

From the point of view of the generator, allow financing of new renewable generation projects. Many of these projects have a really high level of leverage, with which bank financing is contingent on the profitability of the project. It is for this reason that the signing of 10 or 15 year contracts allows companies to guarantee the sale of energy at a given price, so that cash flows are secured before the construction of the same, and this is essential when A large part of these developments are made through SPV’s (special purpose vehicle).

If we change our cap, and we put on the buyer’s, industrial customers are increasingly worried about the item that represents the consumption of electricity within their budget. In the end, signing a PPA for a company means nothing more than diversifying the purchase of energy. By establishing a price and a volume, we mitigate the price risk for a portion of its consumption. This would be the main advantage, although there are also benefits linked to Corporate Social Responsibility of companies. The PPAs are linked to renewable energy projects, therefore, it is normal to include guarantees of origin, which guarantees that the percentage of energy consumed by the company covered by the PPA is renewable origin, we are saying that we consume green energy and this part does not only help the CSR but also helps to channel the brand image as sustainable, green, committed or responsible.

PPA’s are closely linked to the Implementation of Renewables, what is the situation right now?

As we commented on the 2020-2031 energy transition plan blog, last February the Council of Ministers approved the referral to the European Commission of the draft of the National Integrated Energy and Climate Plan 2021-2030. This plan sets very ambitious objectives such as reaching 74% of renewable energy in electricity generation in 2030, 100% renewable in 2050.

Currently the Power Installa in wind is 23,700 MW and is projected according to the objectives of the plan that reach 40 GW in 2025 and 50 in 2030.

As for the photovoltaic solar, it is currently at 5,800 MW and the objective of the 2020 plan is 23,400 MW by 2025 and 36,800 MW by 2030.

It is therefore quite ambitious considering that what we knew as a special regime were projects of up to 50MW and currently the fields that are being built of photovoltaic are around 300 MW and the projected are much more.

We must take into account that there are almost 63 GW between wind and photovoltaic requested, with permission, but still without connection to the network, a figure that exceeds the objectives of the plan and discounting the applications that are not yet approved.

What aspects should be considered when signing a PPA?

There are many aspects that must be contemplated in the signing of these contracts, since as we have already said when dealing with complex contracts, the clauses must be made almost to measure.

Among the most important clauses we must take into account:

Whether or not it includes the GdOs and the price of them, as we have said before, the guarantees of origin are important, and increasingly for companies since the consumer is increasingly responsible.

Guarantees, guarantees is one of the red points in this type of negotiations. Being contracts for 10-15 years we talk about quite high amounts, and guarantees are reciprocal therefore it is a delicate part of the contract.

Negotiating a clause of early departure or variation in the volume of energy of the contract is important, we have to remember that, although the ultimate goal is for the contract to be executed, the time horizon causes the final consumption of industrial customers to vary.

Also important are the causes of Non-compliance with the PPP and the Penalty for the non-termination of the agreement between the parties and the way in which the PPP Amounts will be calculated, in terms of the Liquidation Profile, and Term.

For what purpose do companies use a PPA?

A PPA is not a speculative contract, but serves as a mechanism for risk diversification, linked to prices, associated with energy consumption. The spot market is very volatile, with the coverage in OMIP you secure budget, but the liquidity of the market makes it impossible for long-term closures to be executed. Therefore, companies are diversifying their consumption with other products, combining them they manage to diversify and mitigate risks.

What can we recommend to companies that want to sign a PPA?

A lot of patience since in the end we talk about contracts of 10 years or more, which is not a supply contract at a given year, no. We talk about complex contracts, they are very relevant decisions, and we must take into account and weigh all possible factors in different scenarios. In the end it ends up being a bilateral contract where both parties must feel comfortable, and the contract ends up being a tailored suit for both.

Marta Serrano | Energy Consultant

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