Power Purchase Agreements (PPA’s) have gained significant traction in the corporate energy purchasing market in recent years. In a recent FlexiDAO article, we highlighted PPA’s as a 2021 Energy Trend in Europe, following its rise in the last years. The reason is that this market is only beginning to show its true potential. There are avenues for rapid growth in the PPA market if barriers to contracting are removed and more innovative PPA products are created.
There have already been some innovations with PPA contracting structures and newer variants have come to market in the past couple of years. To help frame where the PPA market is now and what options are most common in the market, we created this guide to help your company navigate the Corporate PPA maze.
What is a Physical (or Sleeved) PPA?
A physical or sleeved PPA is a contract with a renewable energy generator for the delivery of electricity to a site via the power grid. The renewable energy developer and off-taker will agree a price for the lifetime of the PPA which would typically be a fixed €/MWh with some indexation every year.
A physical PPA will allow a third-party power supplier or marketer to sleeve the power volumes into a company’s existing energy contract. Contracting with this method will mean a company will have to deal with variability of the renewable plants power production and how this matches their power consumption. This risk is typically transferred to a power marketer whose trading teams will be responsible for balancing the power volumes.
What is a Virtual (or Synthetic) PPA?
A virtual or synthetic PPA replicates the financial contract that is associated with a physical PPA but doesn’t involve the delivery of electricity. It’s essentially a “financial swap” contract that falls outside the scope of physical electricity delivery. The terms of the contract will usually be set up as a contract for difference.
The company will agree to a fixed price to pay for the electricity generated and then take a risk on the wholesale market outturn price. If the market price they receive for electricity is higher than their fixed price, they’ll have a net benefit on the contract. If it’s lower, then they will be loose out as they’re locked into a higher fixed power price.
Which type of PPA is best suited for my company?
The argument for which PPA to choose can be difficult as it can be hard to see the benefits and drawbacks of each option. The following table maps out the main considerations for both Physical and Virtual PPA agreements.
When we compare the differences between a Physical and Virtual PPA, we see that the two options are very similar. The cost savings, additionality and market image of both types will largely be the same. The differences between the two are hidden in the finer details.
Let’s look at the two main differences between the two and how it could impact a company’s decision on what route to take:
Keep on reading the article in FlexiDAO’s blog.