Australia Energy Market Power Purchase Agreements (PPA) Options

Corporate power purchase agreements (PPAs) have been driving Australia's energy transition towards a more renewable future. On one side, solar and wind farm developers enter into corporate PPAs to fund their projects and ensure a steady income stream.

On the other side, corporations and large entities use PPAs as the best and quickest mechanism to achieve their sustainability goals while maintaining price security and visibility. A well-structured PPA is a win-win for the supplier and consumer.  

Recently, smaller consumers have entered the market. The average size of a corporate PPA was just under 44 MW in 2019, dropping from 65 MW from the previous 12 months. Approximately one-third of the deals concluded were greater than 50 MW, half in the 20-50 MW range, and 10 percent smaller than 10 MW. Most PPAs are concluded in New South Wales and Victoria.

In 2017 and 2018, a large number of investments were directed to new solar and wind projects, but the growth slowed in 2019. Some of the slowdown reasons include grid connection issues, uncertainty around future national energy and climate policies, changing marginal loss factors and the impact on revenue, and concerns on future wholesale electricity prices. The market had witnessed negative prices on some days when the solar output was high. If the solar capacity continues to increase, both energy prices and project revenues may decrease more significantly.

Over the past several years, the number of businesses (manufacturers, universities, councils, state governments, vineyards, etc.) entering into PPAs has grown significantly. The Australian market offers consumers three defined types of PPAs: (1) virtual PPAs (VPPAs), (2) sleeved PPAs, and (3) retail PPAs. Energy users can choose the deal type that best suits their organizational needs and requirements.

VPPAs, also known as green hedges, are commonly used by large corporations. The buyer (corporation) agrees to pay a fixed price for electricity generated by the renewable project and will receive the large-scale generation certificates (LGCs). However, the deal is, in essence, a contract-for-difference (CFD) as there is no physical delivery of electricity. The buyer still has to enter into a retail electricity contract with a local supplier, while generated electricity is sold to the wholesale market where the project is located. VPPAs are usually with new renewable projects – more project offerings and better opportunities to negotiate lower prices. The contract term for a VPPA generally spans between 10 and 15 years.

Sleeved PPAs are another type of PPA commonly used by large corporations. Similar to VPPAs, sleeved PPAs are negotiated with renewable project developers. In a sleeved PPA, a retailer serves as an intermediary handling the transfer of money and energy to and from the renewable generator for the buyer. The retailer directly takes the energy from the project and "sleeves" it to the corporation at its point of intake for a fee. The retailer will also provide a firming load for periods when the renewable generator cannot provide sufficient energy.

For consumers with annual consumption between 5 Gwh and 50 Gwh, retail PPAs are the practical option. Unlike VPPAs and sleeve PPAs, in a retail PPA, the retailer rather than the energy consumer enters into the power purchase agreement with the renewable project developer. The retailer will have separate contractual arrangements with energy consumers, which usually vary from deal to deal. Some provide different rates for electricity generated from the project and for remaining electricity purchased through the wholesale market, which gives exposure to variable spot prices. Others may provide a fixed price for both electricity generated from the project and for remaining electricity purchased through the wholesale market. In the latter option, since the retailer takes added risk (spot market prices), a premium will be built into the fixed price. In addition, an energy consumer sometimes will also sign a separate retail contract with the retailer where green power or LGCs are involved. Due to the limited consumption size, retail PPAs are typically arranged with projects currently in operation. Small-to-medium sized entities usually have less knowledge about the wholesale markets and renewable project development; thus, they are less willing to take long-term project risks. As a result, retail PPAs are the better fit. The contract term for a retail PPA varies from three to seven years.

Although the PPA is no longer a new concept to many organizations in Australia, it still requires industry experience and market expertise to understand, tender, and evaluate different purchasing options and projects. NUS Consulting Group is here to help businesses identify the best energy procurement option that suits their specific needs and specifications.

Martin Shippen