What are bilateral PPAs?

What are bilateral PPAs?

Bilateral PPAS are private, long-term energy contracts typically drafted between an energy producer and a corporate or utility buyer. These agreements are crucial for financing renewable energy projects and provide price certainty for both sides—this flexibility sets them apart from standard energy market contracts, market-based PPAS, or aggregated PPAs.

The structure of a bilateral PPA is as follows:

1. Parties - energy producer and energy buyer

2. Contract

3. Set pricing of energy

4. Length of contract

5. Type of renewable energy

Whether you opt for a standard or bilateral PPA, one thing is clear—they all play a key role in achieving decarbonisation goals.

Who uses bilateral power purchase agreements?

Bilateral PPAs can mutually benefit both the power producers and the purchasers who buy the generated renewable energy.

Typical buyers of bilateral PPAs

For many companies, investing in renewable energy is an attractive prospect, and a bilateral PPA helps them do that—these are called corporate PPAs. Merchant PPAs arrange the sale of energy to traders, who then sell it onto the energy market, while sleeved PPAs involve a third party, such as a utility company.

Renewable developers and independent power producers

Bilateral PPAs can be a stable income source for the plants themselves, providing guaranteed income for developers of renewable energy and independent power producers through small-scale setups such as individual solar or wind arrays.

How do bilateral PPAs work?

Bilateral PPAs are longer-term energy contracts that organise renewable energy payments over a predetermined period. Contract lengths can vary from a year to twenty years or more. There are two main types of pricing mechanisms that bilateral PPAs tend to contain: fixed or variable pricing. Fixed-price bilateral PPAs guarantee a specific price for units of electricity that are consumed during that period, with price fluctuations and market conditions not affecting the terms of a PPA agreement. Variable pricing, on the other hand, combines the reliability of a fixed contract with the flexibility for the pricing to rise or fall above the benchmarked price over time as the market changes.

The energy buyer can structure the contract in two different ways - either as part of a physical or virtual bilateral PPA. The energy buyer receives the actual energy delivery as part of a physical bilateral PPA. In contrast, in a virtual bilateral PPA, the delivery acts as a hedge, which makes the transaction less risky for both the energy procurer and the energy seller. Settlement terms deal with whether the amount and volume of electricity delivered changes from the original contract and might concern the contract's delivery, quantity, price, payment, or termination.

Benefits of bilateral PPAs for renewable energy

One key benefit of bilateral PPAs is long-term price certainty. Entering a bilateral PPA locks in a certain price point for energy over a longer-term period, which means businesses can forward forecast how much their energy will cost them over that period, making budgeting easier.

Bilateral PPAs can increase developers' bankability. The long-term financial commitment from the energy purchaser can reduce the facility's risk and remove uncertainty.

Bilateral PPAs also help to support businesses' decarbonisation and Environmental, Social, and Governance (ESG) goals. ESG goals tend to focus on a company's suitability-led targets, which look at things like a company's carbon footprint and what types of energy it consumes. A bilateral PPA can confirm that a business's energy is coming from renewable sources, which can help feed into these goals more accurately.

Challenges and risks of bilateral PPA contracts

Credit risk and contract negotiation complexity

Market changes and regulatory factors can cause issues when a predetermined bilateral agreement is already in place, but the market or regulations change. This could lead to positives or negatives for both parties and potentially lead to a risk of over- or under-contracting.

If renewable energy pricing drops, the PPA may no longer be a good deal for the energy buyer, and vice versa if energy prices increase. Most new regulations that are being developed benefit renewable energy generators and purchasers, but if they change in a way that negatively impacts either party, the contract could be less profitable.

How bilateral PPAs compare to other PPA types

Bilateral, aggregated, and syndicated PPAs all facilitate the trading of renewable energy, but they feature slightly different structures. Bilateral PPAs are between one generator and one buyer. Conversely, aggregated PPAs are between numerous generators and off-takers, and syndicated PPAs involve several different generators.

Utility contracts involve less price certainty but tend to have lower transactional costs, and market-based contracts see even higher price fluctuations depending on energy supply and demand.

Why are bilateral PPAs growing in popularity?

As the broader energy market begins to welcome green energy markets into the mix, bilateral PPAs offer a clear way for businesses to achieve corporate sustainability goals. They allow businesses to purchase green energy without having to invest in renewable technology or even receive the actual delivery of green energy at all. As governments move towards a renewable-first landscape, policies and investment strategies should bolster the sustainable market, with mandatory policies including an increase in renewable energy consumption and financial strategies prioritising the financing of renewable options.

As the energy market evolves, bilateral PPAs are becoming vital tools for price certainty, risk reduction, and meeting corporate sustainability goals.