Renewable Power Purchase Agreements (PPAs) are contracts to enable companies to source renewable electricity and achieve operational cost savings without making upfront investments.
A PPA is a contract between the corporate buyer (off-taker) and the power producer (developer, independent power producer, investor) to purchase electricity at pre-agreed prices for pre-agreed periods. The contract contains the commercial terms of the electricity sale: length, delivery point/date, volume and price. The electricity can be supplied by existing renewable energy assets or new build projects.
PPAs for newly built projects often have more stringent terms - for example, a duration that covers at least the debt term of the project finance. New project deals are typically long-term (10+ years) PPAs, but short-term PPAs or PPAs for existing assets can have a tenor of less than a year. There is a wide variety of pricing structures, including fixed prices and discounts pegged to wholesale prices.
What are the benefits?
Corporate buyers use renewable PPAs as a means to increase cost visibility, reduce electricity costs and meet sustainability goals. Developers aim for risk mitigation, enhanced bankability and increasing the pool of potential customers. PPAs have many benefits above and beyond CO2 emission reductions, and the likely operational cost savings that can be achieved. Some of these benefits are mentioned below.
For corporate buyers:
Brand and leadership
Signing PPAs equally comes with risks for corporate buyers and developers that need to be efficiently allocated to the party most suitable to manage them. These include, for example, basis risk, profile and volume risk, currency risk, or change of law risks. WBCSD’s guides explain what these are and how companies can manage them.