What are the best tactics for PPA contract negotiation?
The first step is to understand your organisation’s goals and risk tolerance. What will you do if your energy needs increase but energy prices drop since you entered your Power Purchase Agreement (PPA), making your current PPA pricing unaffordable? Stakeholders can start by defining energy procurement goals clearly. Is your aim to reduce carbon emissions by investing in renewable energy via PPAs, or is it to mitigate energy hikes by balancing your energy portfolio across fossil fuel and green energy combinations? Fixing energy prices will allow you to forward-budget your business operations, but taking higher risks with flexible PPAs may result in higher cost savings if energy prices drop, so it’s essential to evaluate your appetite for price volatility and volume risk. Most crucially, you must align internal stakeholders early in the process - we look at the tactics you can use to inform stakeholders from the start.
Choose the right PPA structure
PPAs come in many different forms. The most important thing is to choose the right one for your business needs.
Physical vs. virtual (financial) PPAs
Two types of PPAs are virtual and physical PPAs. Virtual PPAs are generated to help energy procurers reach Environmental, Social and Governance (ESG) goals or achieve cross-border energy exchanges. There is no actual exchange of energy; all transfers are made via Guarantees of Origin using a Contract-for-Difference structure to set the price of energy transferred. Physical PPAs, on the other hand, actually exchange energy, usually in the same region, often using a ‘middle man’ to host the transmission of energy.
Explore sleeved and synthetic options
Sleeved PPAs use a utility provider as an intermediary between the procurer and seller of energy. A synthetic PPA doesn’t, however, use an intermediary. These types of PPA examine increases or decreases in energy pricing and hedge financially against it. The energy procurer receives a benefit if the price rises above the contract price but also compensates the project if the market price drops below the set contract rate.
Know the market and regulatory environment
Stakeholders will need to analyse local market conditions and price forecasts, with pricing mechanisms featuring heavily on the price energy is set at when drawing up a PPA. Stakeholders should consider policy incentives - as we move towards a smart-grid, grid access constraints must also be considered: whether these improve or become more challenging as the grid upgrades and more types of energy are introduced into the mix. Businesses should also account for regulatory risks and potential reforms. For example, jurisdiction and regional law can have an effect on a PPA’s terms, with a regulatory body potentially being drafted in to approve the PPA from a regulatory perspective.
Clarify volume commitments and delivery terms
Stakeholders will want to consider certain elements when structuring the PPA contract, such as baseline volumes and minimum take requirements, delivery points, or potential penalties to producers for non-performance. We examine some of the factors to consider when structuring a PPA.
Allocate risks with clear contractual language
Companies can reduce the financial risk of entering a PPA by structuring their contractual language carefully. It’s important for the procure and producer to work together on the structure of a PPA to determine the benefits to both parties before contracts are drawn up. Hedging methods may be implemented to manage risk from either side, and known energy costs can give a business economic stability.
Shaping, baseload vs. as-produced clauses
Two types of clauses stakeholders should consider are pay-as-produced and monthly baseload clauses. To help mitigate the volatility of renewable energy, pay-as-produced model allows the energy buyer to only pay for actual energy generated. This type of PPA is most suitable for renewable energy sources such as wind or solar, which can be affected by weather conditions, sometimes not producing the predicted energy. These types of PPAs are beneficial to both the energy procurer and energy buyer as only actual energy generated is paid for, without penalisations to either party. Conversely, monthly baseload clauses are only suitable for steady supply of energy. This more risk-averse PPA doesn’t tend to suit more volatile renewable energy sources.
Force majeure, curtailment, and credit support
It’s vital that businesses identify how considerations such as force majeure might affect their organisation under a PPA and what steps they might take to mitigate those effects. Force majeure lifts responsibility from the generating plant when there are forces at play that are outside a plant’s control that might impact its production. Businesses must consider how they might weather this storm if a force majeure clause is activated and address the business readiness for this type of event.
Termination clauses and default conditions
The impact of termination clauses should be considered by both parties prior to contract commencement. From the perspective of the energy procurer, when a contract ends, they may be left without an energy supply and, therefore, potentially have no access to the market. If the PPA ends before the required date, the energy producer may have considerable debt and no incoming finance. Both parties should negotiate a termination clause that will help mitigate these negative circumstances, for example, penalties for early termination.
Negotiate credit and collateral requirements
Energy procuring stakeholders should carefully consider which plants they intend to enter into PPA contracts. To do this they must try to understand the creditworthiness of counterparties before an agreement is structured to assess risk to the procurer. This is to help satisfy the lender who would facilitate the PPA. To assess the creditworthiness and counterparty risk, the lender may request performance guarantees for the producer and examine the credit rating of the procurer for long-term purchasing. Third-party credit enhancements could be introduced to spread the risk if these can't be determined. It’s crucial that when PPAs are drafted, realistic collateral and guarantee conditions are set.
Build flexibility into the agreement
When your PPA expires, you could have the option to renew it at the current rate. However, terms may have to be adjusted if the market has considerably changed since your PPA commenced and the terms renegotiated. For example, the terms may rise or fall in line with market performance. This could be scheduled as a renegotiation window. You may also want to introduce strategies to manage long-term uncertainty. Some types of PPA, for example, bankable PPAs, offer guarantees for risk-averse lenders not sure about investing in green energy. This may be more relevant in areas with volatile economics or energy regulations.
A well-negotiated PPA balances risk, flexibility, and cost certainty. Aligning goals and structuring contracts smartly can future-proof your energy strategy.
