PPA – Power Purchase Agreement: reliable energy contracts

What is a PPA?

The Power Purchase Agreement, or PPA, is, in short, a long-term electricity supply contract. The power purchase agreement is concluded between two parties, usually a power producer and a power consumer. This means: the electricity buyer - which can be a company, for example - concludes a Power Purchase Agreement with an electricity producer - a wind farm, for example. This contract stipulates that the electricity producer will supply the electricity consumer with electricity on a long-term basis or for a contractually agreed, limited period of time. The contract usually also regulates important factors such as the volume of electricity to be supplied, the prices for the supply of electricity, the accounting procedures and any penalties for non-compliance with the contract.

Benefits of a PPA

The idea of a PPA arose from the relatively recent expiry of EEG compensation: A large number of photovoltaic plants or parks, among others, have been in operation for more than 20 years and have therefore been excluded from EEG compensation in recent years or will be in the coming years. This means that plant operators who feed the electricity they produce into the public grid no longer receive the fixed EEG remuneration that was paid for the electricity fed into the grid for over 20 years. Instead, they now receive remuneration that adjusts to the current market situation and can therefore fluctuate greatly.

A power purchase agreement can provide a remedy at this point: After the expiry of the EEG remuneration after 20 years, electricity can again be supplied to the respective electricity consumer at a "fixed price" through an electricity supply contract with fixed conditions. This protects both the electricity producer and the electricity consumer from strong price fluctuations and enables both sides to make long-term calculations - both in terms of expenditure and income. Due to the fixed income from the contract, in many cases the construction and operation of new photovoltaic plants or parks can be planned and financed, which drives the expansion of renewable energies in general. Another advantage is the flexible design of the contract, which can be set up variably depending on the preference of the producer and/or buyer.

For whom is a PPA suitable?

A power purchase agreement is particularly worthwhile for large companies that need to purchase electricity regularly and in large quantities in order to be able to cover the electricity requirements of their current operations. Furthermore, in some countries some utilities are obliged to purchase part of their electricity needs from renewable energy sources. But even for companies for which green electricity is not mandatory, a PPA can be worthwhile: The long-term electricity supply contract ensures that companies receive electricity at contractually fixed prices. Another advantage for companies are the tax benefits that companies benefit from when they invest in renewable energies. Last but not least, the ecological aspect also plays a role in the company, which can enable it to operate in a more sustainable manner and thus also have a more environmentally friendly image.

Forms of PPA

There are now various forms of PPAs, which can be distinguished as follows:

Off-site Power Purchase Agreements

Off-site power purchase agreements are characterised by the fact that the power consumer does not directly purchase the electricity produced by the power generator. The electricity is simply fed into the grid by the power producer and the electricity buyer receives this share of electricity for its needs. The advantage of this variant is that the power generator does not have to be located in the immediate vicinity of the consumer. In this way, the buyer can conclude a PPA with a power generator whose location is particularly suitable for photovoltaic plants or wind farms, for example.

On-site Power Purchase Agreements

In the case of on-site power purchase agreements, the company purchasing the electricity and the place where the electricity is generated are located in the immediate vicinity of each other. For example, a photovoltaic system may be located on or behind the company's premises. It would also be conceivable for a company to make its roof space available to an electricity producer for photovoltaic modules and receive the electricity generated in return. The advantage of this method is that the electricity can flow directly via the immediate connection between the two locations and does not have to be fed into the public grid first. This allows companies to save on network costs, for example.

Synthetic PPAs

In contrast to on- or of-site PPAs, synthetic PPAs decouple the physical flow of electricity and the financial flow of money, which allows for even more flexible contract designs. Although prices are again set between the producer and the buyer, the electricity does not flow directly between the two entities: An energy service provider takes the electricity from the producer into its balancing group. The energy supplier of the consumer, for example a company, then procures this electricity in exactly the contractually agreed quantity. Finally, he passes it on to the consumer. The advantage of these PPAs is that they are simple and require little administrative effort, since there is no direct physical delivery and no direct balance sheet link between the two contracting parties. 

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