Are cross-border PPAs worth the risk?

As someone deeply involved in the energy sector, I’ve seen first hand how cross-border power purchase agreements (PPAs) are becoming a vital tool for energy companies and multinational corporations. These contracts, where the energy buyer and seller are in different countries, offer a way to secure long-term energy supplies while advancing sustainability goals. However, they come with their own set of challenges that need careful consideration. 

PPA Opportunities

One of the most significant advantages of transnational PPAs is the ability to tap into energy resources that may not be available domestically. For instance, a company based in a country with limited renewable resources might sign a PPA with a supplier in a region abundant in wind or solar power. This access to diverse energy sources allows for better energy mix optimisation and helps to meet renewable energy targets more effectively.  

Cost savings are a primary motivation behind cross-border deals. Energy prices can vary significantly between countries due to differences in resource availability, infrastructure and regulatory environments. Companies can leverage these price differences to secure energy at lower costs, especially when dealing with countries where renewable energy production is more cost-effective. For example, a buyer might have consumption in a country where green power supply is limited or where the cost of building new renewable projects is significantly higher than the marginal cost of existing electricity production. 

For multinational corporations with a global footprint, cross-border PPAs offer a way to meet corporate sustainability goals on an international scale. Many multinationals have consumption in several countries below 5 GWh/year and others where consumption is relatively large (>30 GWh). Finding a local PPA smaller than 5 GWh can be relatively expensive. Multi-country PPAs provide an opportunity to reduce the carbon footprint cost-effectively by including areas where consumption is low.

For energy producers, cross-border PPAs open new markets beyond their domestic borders. This can be particularly beneficial for producers in countries with excess renewable capacity, allowing them to sell surplus power to international buyers and improve their financial returns. 

Uncertainties in PPAs

Different countries have varying regulations, policies and incentives related to energy production, transmission and trade. These can change over time, introducing significant uncertainty into cross-border contracts. Changes in tariffs, subsidies or energy export/import laws can affect the economic viability of the agreement. 

International transactions involve dealing in different currencies, which introduces exchange rate risk. Fluctuations in currency values can impact the cost for the buyer or the revenue for the seller, depending on the agreed upon currency for the transaction. Hedging strategies may mitigate this risk but can also add complexity and cost to the agreement. 

Transmitting energy across borders requires robust infrastructure, including transmission lines and interconnectors. The lack of sufficient or reliable infrastructure can lead to energy losses, supply disruptions and increased costs. Additionally, developing new cross-border transmission infrastructure can be time-consuming and capital-intensive. 

Transnational deals often involve navigating different legal systems, which can complicate contract negotiations and enforcement. Dispute resolution can be particularly challenging when parties are subject to different jurisdictions. Ensuring that contracts are enforceable and that there are clear mechanisms for addressing disputes is crucial but can be difficult to achieve. 

Political instability or geopolitical tensions between countries involved in cross-border agreements can pose significant risks. Changes in government, trade wars or sanctions could disrupt the terms, leading to financial losses or termination of the contract. 

Companies need to assess the political climate and potential risks in both the buyer’s and seller’s countries before signing a PPA. 

International PPAs may also involve environmental and social risks, particularly if the energy projects are in regions with weak environmental protection or significant social conflict.

PPA due diligence

Multi-country PPAs can present a promising avenue for companies and governments to secure reliable, cost-effective and sustainable energy when no suitable local alternative is available. The opportunity they offer makes them an attractive option in the global energy market. However, these agreements are not without significant risks: price decoupling between consumption and production countries, regulatory uncertainty, currency fluctuations, infrastructure challenges and geopolitical instability. 

To successfully navigate these risks, stakeholders must conduct thorough due diligence, engage in careful contract structuring and develop risk mitigation strategies. By doing so, they can unlock the full potential of PPAs, while safeguarding their interests in an increasingly interconnected and volatile energy landscape.

This article originally appeared as a column on montelnews.com