How Are Corporate Power Purchase Agreements Priced?

Corporate Power Purchase Agreement: Pricing

A corporate PPA is beneficial to both buyers and sellers because it allows both parties financial security. Energy sellers can forward-project the costly financing of renewable projects, while energy buyers can forecast business operations expenses because they know in advance how much their energy costs will be. 

Difference Between Corporate PPAs and Traditional Utility PPAs

A traditional utility PPA draws up a contract for fixed price energy between a utility company and an energy seller. A corporate PPA cuts out the intermediary - in this case the utility company - so the terms of the contract can be negotiated directly between the energy seller and the business. This is beneficial because the energy provider and procurer can both have influence on pricing, contract length and the structure of the contract.  

Why Do Businesses Invest in PPAs?

Businesses invest in PPAs for cost savings and to achieve sustainability goals, including Environmental, Social, and Governance (ESG) objectives. PPAs offer price stability, protecting businesses from market volatility. However, businesses must weigh the benefits of long-term contracts against the risk of potential market price changes.

Corporate PPA Pricing Factors

Several factors influence the pricing of corporate PPAs:

Creditworthiness of the Off-taker:

The credit rating of the buyer affects financing terms. Lower-risk projects can secure favourable rates, reducing PPA costs.

Size, Type, Location, and Seasonality of Renewable Energy Source:

Geographic location and the type of renewable energy (e.g., wind, solar) impact pricing. Regions with abundant renewable resources may offer lower-cost PPAs.

Contract Length:

Longer contracts provide financial security but may limit the seller’s ability to benefit from future price increases.

Market Conditions:

The volatility of renewable energy markets, influenced by natural elements and supply-demand dynamics, affects PPA pricing.

Regulatory Environment:

Government policies, incentives, and market maturity in a region can significantly impact PPA costs.

Environmental, Social, or Governance (ESG) Goals:

Companies may prioritise PPAs to meet ESG goals, particularly in regions where renewable energy projects have societal benefits.

Are Corporate PPAs Fixed-Price?

While fixed-price PPAs are common, other types offer varying levels of flexibility:

Fixed Price PPA:

Locks in energy prices over a long period, typically 10 years.

Indexed/Floating PPA:

Prices fluctuate with market rates, offering potential savings but higher risk.

Hybrid Price PPA:

Combines fixed and floating elements for a balanced approach.

Bundled Price PPA:

Mixes different energy types, managed by a physical supply service.

Market Following Price PPA:

Provides flexibility with a floor price and potential discounts.

Virtual vs. Physical PPAs: Pricing Differences

PPAs are classified as either virtual or physical:

Virtual PPAs:

There is no physical energy exchange in a virtual PPA. An energy buyer seeks to produce energy that feeds into specific ESG goals through a financial contract that uses a Contract-for-Difference structure to set the price of the electricity. The transfer is done via Guarantees of Origin. This allows cross-border agreements to take place, regardless of whether the seller and buyer are in different countries.  

Physical PPAs:

Physical PPAs involve the actual delivery of energy and in theory this must be done in the same country. Sometimes an intermediary is used to transmit energy from the renewable plant to the energy buyer. 

Understanding the pricing factors of corporate PPAs is crucial for businesses looking to secure stable, cost-effective energy solutions while supporting sustainability goals. By carefully evaluating these elements, companies can make informed decisions that align with their financial and environmental objectives.