Power Purchase Agreements (PPAs) Explained

A growing number of businesses across sectors as diverse as banking, universities and government agencies are using Power Purchase Agreements (PPAs) to procure off-site renewable energy generation to meet their decarbonisation goals.

Corporate Power Purchase Agreements can be structured in many different ways, work in the same way as a long-term contract for energy pricing and may include features such as fixed pricing. This can be a desirable outcome for some businesses.

PPAs can be complex. Having an understanding of the way they work, and any potential risks will help you partner with an energy retailer that best matches your needs.

PPAs and renewable energy claims

The design of the electricity grid means that all electricity, regardless of source, is pooled into the grid and then transported to residential and commercial electricity consumers. This means that unless your renewable energy is built on site (e.g. rooftop solar), you can’t guarantee that your business is using renewable energy from a particular source.

While contracts such as PPAs are a financial agreement as opposed to a physical supply arrangement – they can include renewable energy certificates such as Large-scale Generation Certificates (LGCs) for your business to claim a reduction in greenhouse gas emissions from electricity generation.

For your business to report on or claim to buy renewable energy, any PPA must include LGC acquisition and surrender.

PPAs explained

While PPAs can be used to purchase any kind of energy, in more recent years they have become closely associated with the supply of renewable energy such as solar and wind, and the development of new renewables facilities.

Corporate PPAs are one of the mechanisms through which commercial and industrial energy users can reduce the power grid’s reliance on traditional coal-fired electricity through investment in renewable energy generation and developments.

PPAs allow your business to invest in its renewable energy goals while potentially offering energy price security that enables forward planning and budgeting.

A ‘behind the meter’ PPA is a physical PPA such as a solar array which is installed behind a customer’s meter. ‘In front of the meter’ PPAs are where the energy generator isn’t in the same vicinity as the consumer. This article refers to the latter.

The two main types of corporate Power Purchase Agreements (PPAs) in Australia are:

• Wholesale – a direct, financial agreement between an electricity generator and a customer which does not include retail supply; and
• Retail – an arrangement between an electricity generator and a customer, organised by a retailer. The generator agrees an energy price with the retailer and the retailer passes it on to the customer.

If you need to certify your business’ emissions reductions, large-scale renewable generation certificates (LGCs) can be added to your PPA if not already included.

For those who want to claim “additionality”, that is supporting the development of new renewable energy generation in Australia, parties can sign a PPA before the power station is built as a way to underpin and secure financial backing for the project.

Wholesale PPAs

A wholesale PPA is where a customer (buyer) agrees to a financial contract directly with an offsite renewable generator. Usually, the buyer pays a fixed price to the generator (as seller) and receives spot revenue and LGCs. Payments can be calculated via a contract for difference (CFD) mechanism which can result in credits and debits to the buyer. Where the renewable generation is not aligned with the customer’s load, they require a separate retail supply contract.

Typically, a CFD is considered to be an over-the-counter derivative and customers should check whether their treasury and accounting policies allow them.

Retail PPAs

A wholesale PPA can be “sleeved” into a retail agreement. This can range from the retailer providing settlement functionality and a pool price pass-through mechanism to providing fully-firmed pricing that incorporates the PPA’s renewable generation and price.

Under a retail agreement, the retailer is the intermediary between a customer and the renewable energy project. This removes a level of complexity and negotiation from the customer, as the retailer deals with the renewable project directly.

The detail, risk and pricing of a retail PPA varies between agreements but can allow a customer to have fixed electricity rates that incorporate the renewable energy price and are firmed to their load.

How firming works

If the variable renewable generation you have purchased through a PPA does not match your load, you could be exposed to potentially volatile spot market pricing during these periods. A solution is to “firm” your load, providing an overall fixed price which combines the renewable generation price and the market price.

Potential benefits of PPAs

• Corporate Environmental, Social and Governance (ESG) commitments. Procuring some or all of your electricity and the associated LGCs from renewable generators communicates your business’s commitment to reducing its impact on the environment;
• Lower carbon. A PPA can help the power system reduce its emissions;
• Price certainty for periods where a fixed retail price applies. It’s important to note that retailers may not be able to fix electricity rates for the entire term of the underlying PPA. Instead, the rates may be fixed progressively during the contract term;
• Certainty for generators. If the generator is new or under construction, these agreements can help it secure the financial backing it needs to start development, helping the overall system transition away from carbon-based generation; and
• Helping Australia achieve its long-term emissions reduction plan to get to net zero by 2050.

Considering a PPA for your business?

Think about the following:

• The detailed requirements of your sustainability objectives, including any voluntary reporting frameworks.
• Whether you need to certify your business’ emissions reductions by adding LGCs.
• What contract term are you able to agree?
• Are you comfortable contracting with a renewable generator directly or do you require an electricity retailer to manage this relationship?
• Do you require fixed electricity rates, or can you manage a variable price?
• What is your risk appetite?