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Innovative PPA Models, Structuring and Strategy

June 7th, 2024
Solar PPA

Power Purchase Agreements essentially forms a contract between a renewable energy provider or project and an energy buyer. The energy seller is looking to gain fixed-term investment to finance their renewable project, whereas the buyer is looking to fix energy costs over a long period and invest in companies that will help them reach sustainability targets.

But what type of PPA model is best for your business? We’ll go a little bit more into the innovative structures of PPA that are emerging, as well as what it might mean for your business if you invest in one.

Trends in PPA Structuring & the Role Market Forces Play

There are a various options for structuring delivery methods of a PPA, with the dominant two being pay-as-produced and monthly baseload.

Pay-as-produced PPA

A pay-as-produced model is structured to to reflect the volatility of renewable energy, with the energy buyer only paying the energy seller for actual energy generated. This works well for renewable energy like solar and wind, which are dictated by environmental conditions which in turn affect market conditions. Solar, for example, cannot generate energy during the night and wind cannot generate energy on a calm day. These limitations cause a drop in power when the technology cannot generate energy. This benefits the energy producer because they are not penalised when production dips and also the energy buyer because

Monthly Baseload PPA

As an alternative to the pay-as-produced model, caseload PPAs are structured to favour constant sources of energy from a source. Energy output needs to be delivered steadily and usually benefit traditional power plants such as nuclear. It’s a predictable PPA and may mitigate risk associated with pay-as-produced PPAs, but is usually not suitable for volatile energy sources such as renewables including solar and wind. It can also be difficult to predict the output of energy, and may be susceptible to changes in market conditions, meaning that they’re not always the most profitable PPAs to enter into.

Innovative PPA Models & Strategies for Maximising PPA Value

When taking out a PPA, you need to take a look at your business requirements and attitude to risk. Much like any other high risk product, more profitable PPAs to enter into may come with higher risk, while you may not see a huge saving with a more rigid option.

Standard methods:  Fixed, and Bundled PPAs

More rigid contracts such as fixed PPAs are currently the most common type. This is because they offer savings by fixing energy prices over a prolonged period, say for 10 years, which means even if the cost of energy increases, your energy pricing will stay the same. It also allows for more projected future budgeting, as you’ll know what your energy costs will be for the next decade. These types of PPAs also tend to be simpler to understand and implement, resulting in les administrative effort. The risks are also lower, but with fixed PPAs also comes rigidity - if energy prices drop in the next 10 years, you won’t see the benefits.

Flexibility and Innovation: Hybrid, Floating and Market Following PPAs

While you should always use a reputable financial source to inform you before entering a PPA with a hybrid, floating or market following structure, these types of PPAs can come with the benefit of flexibility. If you want to explore the risk vs. reward potential of a PPA, you could look at the more complex structures offered by these types of PPAs. You could even combine several different energy sources to diversify your energy procurement portfolio.

Technological Impacts of Data Analytics in PPA Design

Using data analytics can help you to more accurately forecast market and benchmark against your own energy consumption, allowing you to negotiate a PPA that fits your business’ energy requirements.

You’ll use data analytics to look at a potential energy producer’s historical output data so you can accurately forecast their expected energy output. This will allow you to negotiate a price based on predicted rather than estimated output, and potentially put penalties in place if those predicted outputs aren’t achieved longterm.

You can use all of the data models to put together a bid based on how much energy you need, how much energy the energy provider can produce and how much you’re willing to pay for it, before settling on a fixed or more flexible market model.

Predicting the Next Big Changes in Financing Renewable Projects

The demand for PPAs has been growing steadily over the last couple of years as the cost of renewable energy generation has come down. This is in part due to factors like a reduction of cost in materials - for example the materials used to produce photovoltaics has dropped, meaning the cost of solar energy has become more competitive.

PPAs were initially popular in the US, with large businesses such as Amazon and Google amongst the first to enter in PPA contracts for their long-term energy costs. But in recent years the European PPA market has been growing in popularity, with tech businesses investing for long term energy requirements.

As businesses engage in more fixed sustainability targets, they are finding different ways to reduce their carbon footprint to hit carbon emission reduction targets. Investing in renewable energy projects via PPAs allows them to do this and meet their own energy consumption needs.

Let us help you find the best PPA structure for you business