What are smart contracts in Power Purchase Agreements?

What are smart contracts in Power Purchase Agreements? 

Power Purchase Agreements (PPAs) are legal contracts drawn up between energy producers, such as power plants, and energy procurers, including businesses or utility companies. PPAs establish a fixed price for energy delivery over a longer period, typically around 10 years. Due to the complex nature of renewable energy production, regulation and delivery, PPAs can be tricky to navigate for both buyers and sellers of renewable energy.  

Smart contracts are transforming regular PPAs by allowing for greater transparency, tracking, and automation, which builds reputation and trust between energy producers and energy procurers. Smart contacts utilise blockchain, which is an automated technology designed to run when certain PPA conditions are met. Due to the automatic execution of smart contracts, utilising them in PPA agreements is beneficial because of their tamper-proof nature. 

A smart contract, also known as a crypto contract, is a software product that transfers digital documents or assets between two parties under contract - such as a PPA agreement. Using specially designed computing codes, smart contracts automate actions within the PPA agreement, taking out the human element and, therefore, the potential for mistakes or forgery. 

Understanding the role of Power Purchase Agreements in the energy market

PPAs are a legally binding contract between two parties, enforceable by law.  

1. PPAs and their role in the energy sector 

A PPA contract is drafted between an energy procurer and an energy producer. Typically, this involves a power plant, such as a renewable energy facility, and an energy buyer, usually a business or utility company. The energy is fixed at a price over a certain number of years - for example, a decade - meaning that a procurer receives energy at a fixed price for 10 years, and a power plant receives guaranteed financing for that period.  

2. Traditional PPAs vs. Digital PPAs 

There are two methods of energy transfer through PPAs: the first is via a traditional PPA, which allows the physical transfer of energy from an energy-producing source, such as a power station, directly to the energy buyer for use or resale. A digital PPA doesn’t deliver the physical energy to the energy buyer; this type of arrangement is often used by utility providers, who don’t want to receive the actual energy and instead sell it on to end users.  

How smart contracts are applied in PPAs 

The benefit of smart contracts is that they can automate certain elements of the PPA function. This might include real-time tracking, which allows smart contracts to track the delivery of energy on a very granular level. Smart contracts can also automate the payment element of a PPA contract, resulting in faster and more effective financing, as well as a reliable source of income for energy producers.  

Using blockchain also encourages the building of decentralised platforms, which in turn enables smart PPAs. Several successful projects have been launched in this field, including those in suburban Australia.  

Benefits of using smart contracts in PPAs 

As smart contracts gain traction in the renewable energy sector, benefits become apparent in how they streamline renewable energy operations. One key benefit is the enhanced transparency and trust that smart contracts can create between parties for PPAs. This is because they are entirely automated and cannot be changed or amended once the contract begins, which ensures complete transparency and adherence to the contract for both parties. The automated element also results in a reduction in administrative overheads and delays. Without human operation, contracts can be drawn up, implemented, and monitored at a much quicker speed than previously seen. For renewable energy, which can be subject to verification issues, such as double counting in carbon offsetting, smart contracts can result in improved verification and enforcement of terms, as these actions are implemented automatically.  

Challenges and limitations in smart contracts

While smart contracts represent a good solution to PPA issues, they still come with implementation challenges.  

1. Regulatory and legal uncertainties 

As information exchange, particularly about personal details, is an evolving regulatory minefield, smart contracts as a solution may find themselves subject to legal uncertainties as regulations change - for example, the recent GDPR changes caused difficulties for many industries during the rollout of the upgrade. Renewable technologies are still an evolutionary technology, meaning that regulations are changing and adapting along with the technologies themselves, making it difficult to predict how change may affect smart contract implementation.  

2. Technical integration with existing energy infrastructure 

One key issue with our current grid is the ageing infrastructure that much of the network is built - it was created primarily for fossil fuel sources. Therefore, some of the more modern technology often has a hard time interfacing with it. Smart contracts are primarily a digital technology, so they may face some issues when interfacing with legacy equipment.  

3. Risks in code reliability and governance 

Reliability and regulatory concerns are often raised by the implementation of smart contracts - primarily in the case of peer-to-peer trading, which would see unlicensed consumers selling energy to each other. Introducing blockchain into the agreement could muddy the waters further, as the energy producer may not be aware of who the energy purchaser is when entering a PPA and the Blockchain provider may not provide security guarantees for either party entering the contract.  

Case studies and real-world applications of smart contracts in energy

Blockchain PPAs are still a relatively young technology, but they enable new market actions, such as peer-to-peer trading and PPA aggregation. Peer-to-peer trading utilises the contractual agreement of a PPA to distribute offtake energy to a third party, whereas an aggregated PPA pools several off-takers together with one energy producer. Blockchain sits at the heart of both of these activities, storing the details of the smart contract in a safe, secure location.   

Ethereum, a decentralised blockchain with the ability to facilitate smart contracts, has recently been implemented as part of an Australian case study in a typical Australian suburban network: consumers, prosumers, a network utility and a retailer. The study used Ethereum as part of a peer-to-peer-based solar project on a local energy market (LEM). Utilising blockchain in this agreement was shown to reduce the electricity expenditure of users whilst balancing the affordability of the blockchain operation costs.  

The future of PPAs with blockchain and smart contracts 

Predictions for broader adoption in corporate energy procurement could be their potential integration with wider initiatives in the carbon reduction cycle, including their role in Guarantees of Origin. Their ability to automate the tracing of energy back to specific sources increases the verification and trustworthiness of a Guarantee of Origin. There is also the potential for integration with AI and the Internet of Things (IoT) in energy management. The IoT relies on a network of tiny sensors that release information about plants, energy transmission networks, and the end users of energy. AI can be used to analyse data from these sources and identify machine health issues before they occur. Smart contracts could automate some of these maintenance health actions before failures occur, removing the human element and allowing for more rapid action.  

Smart contracts streamline renewable PPAs, boosting transparency, trust, and automation—offering a future-proof solution for sustainable energy procurement.