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Renewable PPAs: Benefits, Risks & Market Trends

May 26th, 2024
Solar PPA

Overview of Renewable Energy PPAs

A Power Purchase Agreement (PPA) is a contractual agreement between an energy buyer and an energy seller that facilitates the purchasing and selling of energy. A lender, which could be a credit provider, bank, or finance provider, will lend the money to finance these projects to the buyer.

Because energy prices can fluctuate frequently, PPAs generally span a long time period, for example, 10 years. Setting a PPA over a longer time period can help reduce the risk that the energy buyer, and in turn the lender, takes by investing in the energy seller. The PPA secures the seller’s income stream while the energy buyer benefits from a longer-term fixed energy price.

From a seller's perspective, reasons for entering PPAs include raising capital to launch projects and receiving investment to keep a project running for its full lifetime. From a buyer's perspective, reasons include achieving sustainability goals and reducing carbon footprints—you can find out more about this in the section called PPA Energy Buyer Benefits.

Unlocking Opportunities with Green PPAs

Renewable PPAs can represent sound business investments for buyers and lenders and a viable way to generate funding for renewable projects. Here we’ll touch on some of the benefits of renewable PPAs for all parties:

PPA Energy Buyer Benefits

  • Fixed price of energy over a longer-term period 

  • Allows advance forecasting of energy requirements for the business

  • Results in cost savings as the business can forecast how much energy will cost over a prolonged period

  • A business can invest in a sustainable project, resulting in attributes such as Renewable Energy Certificates 

 

PPA Lender Benefits 

  • A pre-arranged price allows lesser risk because the lender knows how much that energy will cost over that 10-year period

 

PPA Energy Seller Benefits 

  • Increased certainty of project revenue 

  • Secures the financial stability of a renewable project 

  • Ensures a particular amount of energy is sold before it is generated 

  • Means less risk for the project owner as they are distributing energy amongst a diversified group rather than one investor 

Overcoming Challenges & Obstacles of Renewable Energy PPAs

As with any volatile market, entering into PPAs come with risks and opportunities, so it's important to determine whether a PPA would be a good addition to your carbon reduction portfolio.

Knowledge of the Risks of PPAs

You should also think about some of the factors a lender will consider when agreeing to lend in the instance of a PPA. Regulatory risks highlight the issues that may arise from changing regulations, such as a change in taxes and how it might affect the buyer or the seller. Performance guarantees lay out how the underperformance of the renewable energy provider will be treated, whereas credit risks deal with the possibility that a buyer might not be able to make their payments over the lifecycle of the project. 

Identifying Lower-Cost PPAs 

Renewable energy costs have come down, meaning they can be sold more competitively on the open market, but some variants are still costly or higher risk, driving up the price of a PPA. Solar PPAs are generally the cheapest kind of PPA due to the low cost of solar energy. It’s also lower risk compared to PPAs such as wind, because it only produces energy during the day.

Building contracts in line with regulatory penalties

As well as securing risk, funds and sustainability credentials, renewable PPAs can actually help businesses reach wider sustainability goals. Regulations set by governments can stipulate minimum green energy requirements, and taking advantage of PPAs can result in businesses hitting these targets.

Best Practice for Successful Renewable PPAs

Once drafted and signed, renewable PPAs can be a fairly straightforward transaction for both buyer/lender and the seller. We’ve streamlined best practice for ensuring a renewable PPA runs smoothly over the lifetime of the project:

Create a renewable project  

The seller, or project owner, creates a renewable energy project. This can also include re-financing a project that already exists

Build the contract  

The seller, or project owner, will decide how the contract is structured 

Put a call out for buyers  

The seller, or project owner, gauges interest in the market for buyers of PPA who might want to invest in their project 

Rank the buyer offers   

The seller, or project owner, will compare all of the offers received by buyers 

Settle on a price  

Once all of the offers have been received and compared, the seller, or project owner, will negotiate the terms of the PPA contract 

PPA contract signed   

When the PPA contract has been negotiated and finalised, the contract will be drafted and signed 

Sales and risk management   

Finally, when the contract has been signed, risk and sales will be managed throughout the lifetime of the renewable project 

Market Trends of Renewable PPAs: What Lies Ahead

There’s no doubt that globally PPAs are gaining in popularity, but the European market in particular is seeing an increase. As prominent businesses like Amazon - the biggest investor in PPAs in 2023- raise the profile of PPAs globally, the USA still remained the largest market for PPAs last year. PPAs have been operational in Scandinavia and North America for a considerable amount of time, but the market has recently seen seen a bigger uptake in PPAs in Europe, as well as Australia and Asia. This is partly due to the lowering cost of renewable energy, opening it up to wider markets, as well as the green energy transition in corporate environments. 

Imminent green energy goals are also cited as a reason for PPA growth in the future, allowing companies to decarbonise as part of a wider carbon footprint reduction initiative. 

The types of renewable PPAs are also diversifying - solar PPAs are still the preferred - and cheapest - type of PPA, but wind and offshore are also dominant players in the PPA market, while nuclear PPAs are also on the periphery.

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