Power Purchase Agreements (PPA’s) are an agreement between the owner/developer of an asset that produces power (electricity), and a company who wishes to buy the power from the asset. Contract lengths generally range from short-term 1-year to long-term 15 years and more depending on the type of asset. The advantage to the owner of the asset is that a contractual PPA will give them a guaranteed buyer for their output, and subsequently make it easier for their project to receive the financing it needs to build the asset. The advantage to the buyer of the output is that they receive a guaranteed level of output over a number of years at a set price (generally cheaper than what the current electricity price would be, or is forecast to be in the future). The risk lies in the price – the developer will look to maximise the price they receive for their power, making the asset as profitable as possible. For the buyer, there is a price risk where, if the pre-agreed price turns out significantly higher than the actual outturn power price, then they are in the situation where they are paying more for power than what they should be.
Who buys PPA’s?
Historically, energy suppliers (such as the ‘Big 6’ energy retail firms) were amongst the main buyers of PPAs. However, in recent years there has been a growing trend towards large companies entering into PPAs as this allows them to secure ‘green’ energy to match their electricity usage. Amazon and Google are both buyers of a significant number of PPA’s. Amazon has set a goal to have all of their operations powered by renewable energy by 2025 (in 2019, 42% of their operations were powered by renewable generation). They have entered into multiple PPA agreements, and now have 91 projects worldwide, with a capacity of 2.9GW of electricity (majority of which comes from windfarms and solar sites).
Future of PPA’s
The current trend of large companies signing PPA’s is likely to continue with increasing focus on company’s ‘green credentials’. On a smaller scale, who is to say that local or community led PPAs will not become part of the PPA industry? You and your neighbours could team up to buy power from a local windfarm or solar site that could supply your homes for years to come!