Buying renewable energy via a Power Purchase Agreement, Part 1, Introduction

 

An introduction to PPAs
An introduction to PPAs

In a previous blog post, we analysed eight ways to reach 100% renewable electricity, looking at several buy and build options. In last week’s blog post, we investigated various EPC (build) options. In today’s article, we will shed more light on buying renewables via Power Purchase Agreements (PPAs).

In next week’s blog post (Part 2), we will look at the PPA options in greater detail.

What is a Power Purchase Agreement?

A Power Purchase Agreement (PPA) is an agreement between a buyer and a generator to buy renewable energy at an agreed price for an agreed period of time.

In the ‘traditional’ electricity market only large energy retailers and a small handful of very large energy users buy power directly from generators. In the emerging renewable energy market corporates and groups of businesses are seeking to engage with specific renewable energy projects.

In the past few years, we have seen both corporations and local governments entering into long-term Power Purchase Agreements with the aim to reduce electricity costs, manage volatile electricity prices and meet carbon reduction targets.

Under a PPA, you negotiate a rate per megawatt hour that covers all costs including financing, construction and maintenance of a renewable energy asset. No capital investment is required. The renewable energy project developer owns the generation asset, and the performance risk also sits with the developer.

How can you enter into a PPA?

Currently, the corporate PPA market in Australia is still immature. However, the market is evolving rapidly partly due to the increased appetite of consumers for renewable energy and partly due to the cost differential between regular grid power and long-term PPA prices.

With more and more deals being made, there are now numerous models available that can be tailored to fit your situation. For instance, major retailers are examining corporate PPA products that integrate renewable and grid power into a single agreement – supplied from their existing portfolio of utility-scale projects. This will make it easier for you to enter into a PPA. Numerous smaller and emerging retailers are seeking to package and offer renewable energy PPAs from project portfolios, with innovative and more flexible contract terms that aim to deliver value over the contract term.

Before going to market for a PPA, you need to understand your own electricity demand profiles and how this might change over the term of a PPA contract. For instance, as you implement LED lighting, install solar PV, or acquire new assets, your demand profile may change.

It will also help if you are informed about the key risks (market, delivery, firming, intermittency of generation, duration) you want to manage. You should consider engaging advisors who are appropriately qualified to help you get the best deal for your circumstances.

Using the electricity from your PPA to offset your energy consumption

Energy efficiency and onsite solar PV installations are only able to reduce your carbon and energy footprint by a certain percentage. If you are looking to increase your renewables further, you need to look outside the box and consider either building a mid-scale plant yourself or purchasing the output from another renewable energy plant.

An advantage of offsite PPAs is that you can power multiple sites with a single project. Offsite PPAs also overcome problems such as availability of space or renewable resources at your sites’ locations and can offer economies of scale due to their size. It is up to you to choose the percentage of renewables. You could go to market for 20% of your load, or 100% of your load, or start small and progress to 100% renewables over several contracts.

If you are only purchasing the ‘black’ portion of renewable energy generation, so only the power portion (please see next section), you need to be careful about how you frame your renewable energy claim. If you are also purchasing the LGCs from the project and retiring them, then you can claim both the renewable energy as well as the carbon reduction of the renewable energy production.

Bundled versus LGC-only PPAs

Power Purchase Agreements can be undertaken for power only (the ‘black’ portion), the green attributes of the power (the ‘LGCs’), or for both (‘bundled’). Purchasing the electricity will only provide a medium to long-term hedge against volatile electricity prices but does not include the purchase of LGCs. A bundled agreement is likely to achieve a lower price for the LGCs than an LGC-only agreement.

Bundled versus LGC-only PPAs
Bundled versus LGC-only PPAs

Entering into an LGC-only PPA means that no load balancing needs to be undertaken, whereas a bundled agreement means that for ‘sleeved’ and ‘direct’ PPAs, your energy needs will have to be balanced with energy produced from renewable energy generators.

If LGCs are on-sold or used to offset the compliance obligation, a bundled contract is a more comprehensive hedge against future price volatility. A bundled contract hedges against both electricity and LGC pricing.

Should you undertake a PPA?

PPAs are a great way to achieve your carbon reduction and renewable energy goals while providing a hedge against volatile electricity prices. However, to undertake a PPA a change in thinking is required. While, typically, organisations are used to procuring electricity for between one and three years, in the current market a PPA is a long-term commitment, typically around 10 years or more.

To achieve a good price and to make your effort worthwhile, it is advantageous to have a sizeable energy consumption. Unless you are a large energy user, you should consider aggregating your energy demand with other organisations that have similar objectives to you.

The current PPA market has great opportunities for buyers of renewable energy with competition for customers, continuing low-interest rates, a large number of planned new projects and declining technology costs.

Setting up a PPA can be complex and time-consuming, so we recommend working closely with a trusted advisor to determine which option is best for your organisation. Please contact Barbara or Patrick to find out more.

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