Power Purchase Agreement for Renewable Energy Management

• Utilities are looking to reimagine the technology ecosystem to enable the ongoing business disruption.
• We have a wealth of industry experience from our collaboration with the experience of working with over 100+ leading utilities customers, of which 11 are Fortune 500.

Overview

Traditionally, utilities have procured electricity from generators, often on a short-term basis without long-term price certainty and with no control over the source of power delivered. Recently, organizations are increasingly looking to reduce their environmental footprint and their energy costs. This is leading to utilities purchasing directly from renewable energy generators more and more.

Contracts between interacting parties are usually known as “Power Purchase Agreements” or PPAs. PPAs are long-term contracts to buy renewable energy in agreed volumes and at prices that meet the needs of the generator and the utilities. These renewable energy agreements provide both parties not only with financially beneficial solutions, but also secure clean renewable energy supplies to the consumers and enable investment in additional renewable energy developments.

The key drivers for the Power Purchase Agreements are listed below:

• Revenue certainty – Long-term price certainty is more important than ever. PPA is a tool that can be used to provide secure long-term revenue to projects. This could be in the form of a fixed price or a price that floats within a band.
• Timing certainty – PPA contract can be negotiated bilaterally on a schedule that suits generator and offtaker (that receives purchased energy).
• Project bankability – The secure contracted revenues from a credit-worthy counterparty provided by renewable PPA reduces the volatility in revenues for the project and enables financing to be secured more easily.
• Electricity costs – PPAs provide long-term certainty in electricity costs, protecting business from volatility in energy prices. The offered prices are normally below analyst’s forecasts of future electricity price, locking in potential cost savings together with customized flexibilities.
• Business sustainability – In today’s energy transition context, it is observed to have an evolving trend to get into a bilateral agreement between the offtaker and the generator primarily focusing on sourcing the energy from renewables such as solar, wind, hydro & bio energy. Choosing a corporate renewable PPA can help the organization reduce its carbon intensity and help progress towards its renewable energy targets.

SOLUTION

In the case of renewable PPA, we see in the UK, the generator and the utility company sign a contract whereby the generator promises to supply agreed volume of energy with certificates supporting guarantee on the renewable sources of energy. The utility, i.e. the buyer, is obliged to pay the agreed price for the tenure of the contract irrespective of the fluctuations in the energy market price. Any amendment to the contract is performed based on mutual consent following agreed way of managing changes. For example, the generation outage or site amendments are collaboratively addressed during the lifecycle of the PPA contract.

In the United States, the developer usually retains the ownership and responsibility for the operation of the renewable energy system and assumes the performance risk. PPAs with either onsite or offsite projects can be referred to as physical PPAs or prepaid PPA. In general, PPAs can be structured in many ways to shift or mitigate risks for the parties involved i.e. the buyer, third-party lenders (financer), the developers (install, operate, and maintain energy sources), etc.

In prepaid PPA arrangement, the customer pays the total discounted cost of the full PPA up front, with no payments made during the term of the agreement. The financier assumes no credit risk because the customer makes all payments in advance. Applicable federal tax credits for renewable projects stay with the developer and usually result in lower energy prices for the end-user. Third-party lenders can monetize available tax incentives.

In Australia, three types of PPA are common:

• On Site PPA – the system is installed on customer’s site
• Sleeved PPA – an agreement between the wind or solar farm and an energy retailer
• Synthetic PPA – also called virtual PPA, typically these are between large businesses and directly to the renewable generator.

It is important to note that the Off-Site PPAs are only available to customers who have ‘contestable’ retail choice, which in Australia, are most companies who use over 160MWh per year per NMI (National Meter Identifier).

The key differences between Sleeved (Direct) PPA and Virtual PPA are –

• The buyer does not need to be intimately familiar with wholesale power market dynamics; and
• The buyer is not subject to wholesale power market price fluctuations because the utility bears the market risk.

The solution needs to encompass several scenarios such as contract for energy & certificate together or contract for renewable energy certificate only depending on the geography and the parties involved. A robust contract management database with flexible user interface is part of the core requirement. Considering the nuances of individual utility this could get extended to various downstream & upstream processes.

At times, home-grown purpose-built solutions may potentially make more sense and become beneficial to business over the industry driven COTS products.