A Power Purchase Agreement (PPA) is a reputable way for large electricity users to reduce their Scope 2 emissions through the direct procurement of renewable electricity from a new generator (typically wind or solar). PPAs provide multiple sustainability benefits including additionality (direct funding of new renewable electricity generation) and traceability of the associated Energy Attribute Certificates (EACs). When exploring options for PPAs as a long-term procurement / decarbonisation lever, there are various integrated considerations for companies to address.
What is a Power Purchase Agreement (PPA)?
A PPA is a direct contract between an electricity user and a renewable electricity generator. This contract allows the electricity user to claim use of the renewable electricity produced by the generator through the transfer of Energy Attribute Certificates (EACs).
A PPA is a long-term agreement, covering a set volume of electricity for (typically for periods of 10-15 years), however, shorter-term options are becoming more available.
Due to the administrative and legal resourcing required to enter into a PPA, PPAs are often recommended to cover a minimum of 40,000 MWh.
What are the Types of PPA?
There are different types of PPAs available to companies, which will require a detailed assessment to determine the most suitable option(s), including an assessment of market conditions, volumes, decarbonisation goals and financing arrangements.
On-site Physical PPA
A direct wire connects the generator and electricity user, allowing connection to the site without the use of transmission and distribution systems. These can be more suitable for a smaller electricity offtake but have geographical restrictions. This includes PPAs attached to self-generation in the form of rooftop solar PV as well as larger on/near-site generation.
Off-site Physical PPA
A contract with a generator within the same electricity market which allows for electricity to be transferred to site through local transmission and distribution systems. The contract is set at a fixed price including installation costs, transmission and EACs. This may need to include a third-party electricity supplier to transfer the electricity via the local grid, known as ‘sleeving’.
Virtual PPA (VPPA)
A financial contract between a renewable generator and electricity user which does not involve the physical transfer of electricity. Organisations invest in the development of renewable electricity in exchange for EACs. Consumption can be aggregated across multiple markets in the USA-Canada or EU AIB (Association of Issuing Bodies) integrated markets, enabling a larger VPPA offtake.
Electricity users are still required to procure electricity separately. VPPAs are priced using a contract for difference (CfD) where the generator and energy user agree on a fixed strike price and, typically monthly, settle the difference between the market price local to the generator and the agreed price.
What are the Benefits of a PPA?
For large electricity users looking to secure carbon reduction goals for Scope 2 emissions, a PPA is a strong method of decarbonising electricity. The main benefit of a PPA is that it directly contributes to the development of new renewable electricity, which is best practice in sustainability known as ‘additionality’ (i.e., the creation of new renewable electricity generation which would not exist with the offtaker’s direct funding).
A PPA also has the benefit of directly linking the corporate electricity user and renewable electricity generator, increasing the proximity of the organisation to the electricity and the traceability of supply.
There are financial business case benefits to entering a PPA. This is largely due to risk management and the long term hedged electricity price, although PPA prices can sometimes be set below the wholesale market price, resulting in savings compared to a standard electricity supply. Furthermore, on-site PPAs can see a positive return on investment where non-commodity costs are excluded.
What are the Key Considerations for PPA Feasibility?
While PPAs do provide a variety of benefits, there are also a range of considerations which must be addressed in order to confirm the suitability for each company.
- Internal Resourcing: A large amount of internal administration and resourcing is required, including but not limited to legal support, PPA specialist consulting and financial planning.
- Volume: to account for potential future changes in electricity consumption and diversify supply, it is recommended to place 40-60% of electricity consumption in a PPA. This requires a company to consume around 100,000 MWh electricity per year to reach the 40,000 MWh recommended for a (typical) PPA to be commercially feasible. Note, smaller volume PPAs are available across different markets on a case-by-case basis.
- Location: A PPA must be in the same electricity grid as the electricity user and a VPPA within either the same electricity grid or interconnected market. Some locations are more suitable for PPA development based on the volume of renewable electricity generation and local market regulations.
- Market Conditions: Physical PPAs are only available in deregulated markets with open access to the electricity grid.
- Financial Product Considerations: A VPPA counts as a financial product and must be included in an organisation’s financial accounts.
- Timing / Risk: There can be risks associated with a PPA, for example, when an incomplete asset faces barriers or delays to completion.
What is the PPA Procurement Process?
Developing a PPA agreement can take around 6-18 months due to the lengthy procurement process and legal reviews required. An organisation must develop the PPA specification covering term length, location, volume, and technology type. The organisation will then issue an RFP to renewable generators and review the responses.
Selected suppliers will be invited to a best and final offer follow-up bid, which will be put to a second review. Once a generator has been selected, the terms of the agreement are negotiated and agreed with all relevant parties.
How can NUS Develop Your PPA Strategy?
NUS offer a specialist range of PPA strategy and energy procurement services. This includes a review of PPA opportunities across selected markets, developing a PPA strategy, support with an RFP, sourcing sleeving requirements, and compliance and performance monitoring. For more information contact us online or find your local NUS office.