How Corporate PPAs deliver price certainty and carbon savings

PPAs are often used by procurement managers, CFOs, sustainability teams, or legal advisors to understand the nuances of a specific power delivery deal.

PPAs differ from traditional supply contracts in that they fix the price of energy for an energy buyer over a longer period. Despite any changes in the financial, political, or market landscape, the price of energy will not change, resulting in monetary savings for the energy buyer. Therefore, PPAs offer notable benefits for cost control; having a fixed energy price allows the procuring business to forward-plan operations, as they know the cost of their energy for a fixed period. 

From the power producer's perspective, cost-control benefits include guaranteed income for the plant throughout the PPA's lifetime. Carbon-reduction benefits also apply: the company procuring the energy is guaranteed 100% renewable energy if it opts for this as part of the PPA agreement.

What a corporate PPA is and how it works

Two key types of PPAs are physical and virtual, also known as synthetic. The crucial difference is the exchange of energy. Physical PPAs involve an actual exchange of energy (usually in the same region), but in some circumstances, they use an intermediary. Virtual PPAs do not facilitate the actual exchange of energy. This makes cross-border energy exchanges much easier, and often Guarantees of Origin (GOs) are used to verify energy transfers. Companies sometimes use virtual PPAs to achieve Environmental, Social and Governance (ESG) goals, as GOs can prove they’ve invested in sustainable energy sources. 

Contract structure can be built with a short or long-term tenor, ranging from 2-10 years or longer. Credit requirements apply to the lender or investor, as well as the power producer and power procurer. Both participants should have strong credit portfolios, making them ‘bankable’ investments.

Commercial benefits: price certainty and cost visibility

PPAs can deliver benefits that safeguard against unexpected energy costs.

Hedging against wholesale volatility:

PPAs allow power procurers to hedge against volatility by guaranteeing a source of power at a set price for a set period, regardless of market energy prices.

Forecasting and budgeting benefits:

If an energy procurement business knows the set price of energy over a specific period, it can forecast operations for that period without having to factor in pricing volatility. This is a crucial budgeting benefit, as they know this constant won’t change. 

How PPAs interact with retail supply contracts:

A sleeved PPA installs an intermediary receiving and delivering the supply of energy to an end customer. The retailer will manage elements such as firming, which balances the supply and demand of the energy.

Carbon benefits: additionality and traceability

PPAs can help to increase transparency of an energy procurer’s power sourcing, assisting with factors such as sustainability reporting. 

Emissions accounting and certificates:

PPAs can help report reductions in scope two emissions by purchasing Guarantees of Origin, which specify the source of the energy and the percentage of renewable energy purchased. This can contribute to carbon-reduction targets or Environmental, Social and Governance (ESG) goals. 

How PPAs support genuine new capacity:

The financial stability benefits aren’t just for the power procures - power procurers can also benefit from financial stability under a PPA. The longevity of a PPA can provide guaranteed financing for a renewable energy development, providing economic certainty for a new or existing renewable project.

Structuring a PPA deal: terms and pitfalls

A PPA should be carefully structured to ensure that both parties benefit from the agreement. 

Pricing formula, volume tolerance, and shape risk:

There are several key calculations that can be used to determine pricing formulas. The basic calculation is base price + adjustments + risk premiums. This allows each party to allocate risk and calculate the cost of electricity.

Legal and credit considerations:

Ensuring that the terms of the PPA are legally binding is crucial to a strong PPA structure, as it guarantees that both parties will benefit from the agreement and accept liability in the event of a conflict. The credibility of both parties will usually be a factor in determining whether either party wants to enter the agreement. 

Internal approval and governance process:

To move a PPA from concept to implementation, an internal approval and governance process is typically in place. This scopes out the project and its suitability for a PPA before all parties sign it off internally