Introducing the ABCs of PPAs
In Brief
How can clean energy cut a broad swath after the broadest economic shutdown in history? One technique involves supplying megawatts at a set price to a large customer via a purchase agreement.
In our three-part series, we'll examine how Power Purchase Agreements (PPAs) work, how they've evolved, and how they can extend clean power with lower risk for large buyers.
The series will showcase PPAs' two main flavors, the risks they create and manage, and innovations that can make them more appealing to more buyers. Enjoy this overview and explore the technique's lexicon, risks and evolution.
Though operating in distinct markets, each with unique business needs, companies from Sprint to Gap to the Clorox Company have all taken on a novel technique for energy procurement in the past year: the power purchase agreement (PPA).
Accounting for more than 10% of all renewable energy capacity added in 2019, totaling between $20 and $30 billion, PPAs can stand as a durable model for increasing the market share of fossil-free energy over a period of decades. As companies keep growing more conscious of their environmental footprints and more accountable to stakeholders in their efforts to achieve energy efficiency, the device can protect developers against volatile prices and protect energy purchasers against unpredictable supply. The series we'll roll out in the next week aims to explain the nuances behind these increasingly prevalent contracts and equip interested buyers to negotiate effective PPA deals.
The first article in this series elucidates the two main forms of PPA contracts: physical PPAs and virtual PPAs (VPPA).
In short, with VPPAs, buyers do not take physical delivery of the energy generated through the developer, whereas in a physical PPA, companies own the generated electricity. More generally, both forms of PPA are formal, long-term contracts between a private or public energy buyer and the owner of a renewable electricity generating project. These contracts enable third-party developers to secure a steady source of funding for the installation, maintenance, and operation of their renewable energy generating facility, while allowing buyers to lock down a pre-determined price for purchasing the facility’s energy over a specified period of time. An enhanced understanding of the various benefits underlying each form of PPA better enables corporate executives to determine which contract structure best suits the specific needs of their respective businesses.
Though PPAs present companies with the opportunity to reap cost savings and embark on an accelerated path towards sustainability goals, they also entail certain risks that prospective buyers should know. The second article in this series dives into a number of these key risks, including potential volatility and divergence of wholesale and retail market prices, and concludes with a range of risk mitigation strategies available to PPA off-takers.
The final article in this series explores how industry experts are developing innovative variations on traditional PPA models, with the aim of facilitating company participation. This article takes a deeper look at Microsoft’s recently implemented Volume Firming Agreements (VFA), which allow buyers to better manage the weather and operational risks associated with pricing fluctuations for renewable energy – and which Microsoft believes can pave the way for simpler, more standardized PPA products that smaller companies, without the internal resources of large companies, can nonetheless sign onto. This article also examines LevelTen’s (a Seattle-based startup) promising solution for reducing barriers to corporate procurement of renewable energy through standardized, aggregated PPA products that connect multiple buyers and sellers. This novel approach can reduce costs, streamline the procurement process, and enable new consumers to enter the PPA market.
This series of articles will provide those interested or working in corporate renewable energy procurement – whether a more seasoned expert or someone with less experience – with key concepts to better understand how PPAs work, how the landscape is evolving, and examples of creative solutions to bring more players into the market.
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