What is PPA?
A PPA (Power purchase agreement) is a contractual agreement for the sale of a certain amount of energy that is generated by a renewable energy source (RES). Usually, PPAs are concluded for a relatively long period of time (between 10 and 20 years) for a fixed price, or for a price linked to market factors.
What is the use of PPAs?
The use of PPAs varies for each of the parties in the contract.
From the perspective of the producer of energy, PPA guarantees long-term buyout of their energy from renewable sources, i.e. secures stable revenue for power plant maintenance, return on investment, and profit. In that regard, PPA is a wonderful instrument to secure the profitability of the power plant.
From the buyer’s point of view, the fixed price under a PPA means a predictable cost for buying energy in the long term, which protects the buyer from fluctuations on the open market and provides him predictability and a certain level of security of supply. The level of security of supply is present even when the price is not fixed but linked to market factors. That being the case, the price remains a variable, but even so, it is still lower than the market price, which the buyer would otherwise have to pay for the same amount of energy on the open market. Another significant contribution of PPAs are the so-called “green certificates” in favour of the buyer. These certificates can be used for the implementation of ESG projects and, to a great extent, materialize the commitment of the buyer as a company to protect the environment and mitigate its climate impact.
On a wider perspective, PPAs also guarantee benefits for financial institutions – it acts as security for part of or the whole given financing while at the same time constitutes a contribution to the implementation of the ESG projects of the given institution.
To a certain extent, PPA helps balancing the electricity grid. It leads to the distribution of physical streams of energy, lowers the amount of generated energy, which needs balancing, and assists operators of transmission and distribution systems in the physical balancing of networks.
What are the main types of PPA?
Depending on the delivery method, PPA can be distinguished as:
- Physical PPA – with this PPA the energy consumed by the buyer is delivered from the producer`s power plant;
- Virtual PPA, also known as a “financial” – is where the buyer and seller negotiate the price and quantity, but the energy delivered to the buyer does not necessarily come directly from the producer`s power plant. In the EU, a virtual PPA is considered a financial derivative;
- Sleeved PPA – this PPA is used when the producer can’t sell directly to the seller (for example, because of a lack of trading license or other reasons); in this case, the producer sign an agreement with a trader, who sells to the buyer the energy they bought from the producer.
Depending on how the amount of electricity purchased is determined:
- As-generated PPA – with this PPA, the buyer consumes the whole amount of generated electricity from the power plant; this is the riskiest product due to the hard-to-determine energy generating profile of the RES power plants; typically, only a buyer with a certain level of experience and professionalism can buy such a product;
- Baseload PPA – with this product, the producer transforms the generated electricity into a base load (the minimal amount of electricity needed by the buyer for a certain amount of time – day, week, month, year, etc.); this is a more common product, but not all producers can offer it due to considerations regarding their generation portfolio;
- As-consumed PPA – the producer transforms the whole generated energy into a production schedule that matches the consumption schedule of the buyer; this is a relatively common product in which the producer provides additional added value to the power itself; this product is only offered by producers with a large enough portfolio of power plants that are able to cover the needs of the buyer in any given moment.
The focus of the article below is the physical PPA, given its widespread popularity.
Content of a PPA
A PPA doesn’t have a specific regulatory content. The most commonly used format for physical PPAs is the EFET (European Federation of Energy Traders) contract, as EFET offers a contract draft compliant with Bulgarian legislation. The content of the contract is only recommended and can be divided into two parts: general clauses, which are common for all types of contracts for the purchase and sale of goods, and specific clauses, which are common for contracts for the purchase and sale of electricity.
Some of the general clauses are: i) subject of the contract—physical delivery of the electricity, ii) definitions, iii) liability for non-performance, iv) force major, v) change in law, vi) term and termination rights, vii) insurance, viii) limitation of liability, ix) invoicing and payments, x) transfer of contractual rights, xi) confidentiality, xii) representations and warranties, xiii) performance guarantee, xiv) applicable law and dispute resolution.
Specific clauses in the contract are: a) seller`s conditions precedent – to have all the necessary approvals to operate the plant and perform the contract; b) buyer`s conditions precedent – to have all necessary approvals to act as a buyer under the contract and to perform the obligations stipulated in the latter; c) pricing; d) forecasting of the generation; e) suspension of the electricity supply; f) suspension of the generation; g) metering of the electricity; h) obligations related to the plant – operation and maintenance; i) delivery, measurement, transmission, transfer of risk and no encumbrances of electricity, subject of the contract; j) obligations relating to the transfer of certificates of origin for electricity; k) delivery, transfer of the risk and no encumbrances of the certificates; l) termination amount; m) fallback prices and fallback procedure for market disruption; n) guarantees and credit support.
PPA in Bulgaria
How far we have come?
Here, PPAs are still “crawling”. But we have to note that in the last year, a few PPAs by big companies – end consumers have been signed. At the same time, news of such new PPAs is becoming more of a common occurrence.
Features of the PPA market in the country.
The limited market for PPAs is mainly due to the fact that renewable plants commissioned only after January 1, 2019, can freely sell their generated electricity and respectively sign PPAs. According to the Energy Act, all producers having power plants with installed capacity of 500 kW and more are obliged to sell the electricity they produce on the Independent Bulgarian Energy Exchange. The latter applies a different form of contractual terms with its customers, which cannot be perceived as PPAs, thus leaving substantial amounts of electricity outside the PPA market.
In our country, the PPA buyers are mainly electricity traders (the activity requires a license) and non-household end customers. To enter into a PPA, they must conclude a contract for access and transmission through the relevant electricity transmission or distribution network. The electricity sold is metered by registering schedules, but it is possible to agree that the measurement will be based on the metered electricity produced by the power plant.
On the other hand, a lot of prerequisites for the development of a liquid PPA market in the country are present. Some of them are: lower prices of solar panels in combination with an increase in their effectiveness, which also applies for wind generators; an increase in the share of market participants who are signing agreements for electricity with freely negotiated prices; the introduction of an obligation for the companies to perform ESG projects, which the conclusion of the PPA can undoubtedly be described as.
Of course, only time will tell whether the existing barriers will be overcome and how swiftly. And until then, the measures of the EU for mitigating climate impact and sustainable business development will resume to be one of the main reasons to enter into a PPA.
The present article is for informational purposes only and does not constitute legal advice.
For further information contact:
Aleksandar Aleksandrov, Senior Associate