Why are power purchase agreements essential for renewable adoption?
INNOVATION is the key to decoupling the world from fossil fuels, but it’s not enough to spur widespread renewable energy adoption. Green power generation is a business, so it must be commercially viable. Various technological breakthroughs fail because they’re unattractive investments for energy producers and end users. Power purchase agreements (PPAs) represent a win-win solution.
What is the purpose of a power purchase agreement?
A PPA is a contract between a renewable energy supplier and an energy buyer — o -taker — establishing a nancial framework for selling and purchasing clean electricity. Renewable energy suppliers develop, own, operate, and maintain green power infrastructure. They can be independent power producers, utility companies, or cooperatives. An o -taker — which could be a government agency, corporation, educational institution, or individual — purchases the green electricity the power producer generates.
Partnering with a buyer gives the renewable energy supplier a reliable source of revenue and ensures the green electricity it generates becomes pro table. This procurement agreement also makes securing funds to nance a project through third-party investors and lenders easy.
Committing to buying electricity from a renewable energy supplier helps a customer decarbonize without dealing with the risks of managing a solar, wind, hydro, or geothermal power generation facility, which can be complicated and hazardous. This arrangement uncomplicates the path to sustainability.
Without PPAs, renewable energy projects become riskier due to high exposure to merchant markets in jurisdictions promoting less regulation and more competition to drive down electricity prices. By participating in the wholesale market to sell power, independent producers must stomach these swings and put up with below-expectation cash ow. PPAs allow them to reduce merchant risk and enjoy nancial certainty.
The renewables industry is entering the market integration phase, triggering governments to phase out regulatory incentives. Subsidy-free project developers and investors can use long-term xed-price contracts to secure steady revenue streams and use annual price escalation to o set in ation. PPAs enable power producers to access capital more easily while sparing end users from the complexities of green electricity production.
Types of power purchase agreements
PPAs can be long-term or short-term, xed-price or indexed, and physical or virtual:
Long-term contracts: They guarantee revenue streams for decades, which helps ease the apprehensions of investors and creditors.
Short-term PPAs: These contracts are a new concept to spread the risk between the supplier and the end user. They let both parties renegotiate terms more frequently with prevailing market trends in mind. This way, stakeholders can address and minimize the nancial impact of the ever-changing renewable energy landscape.
Fixed-price PPAs: These arrangements allow buyers to lock in an electricity price, reducing worry about market volatility throughout contract durations.
Indexed PPAs: These contracts stipulate that the clean electricity price should follow a speci c market index’s movement. Although the cost of electricity generated using solar photovoltaics dropped by nearly 89% from 2010 to 2022, it’s still subject to cost swings. These PPAs ensure the expense re ects the in uence of market drivers like in ation. They can shield green power producers from losses, keeping their assets pro table.
Physical PPAs: They require energy production to be near the end user. The producer must deliver power onsite directly or feed it within the same grid. These arrangements entitle buyers to clean electricity output but render power occasionally unavailable due to infrastructure maintenance and repairs.
Virtual PPAs: Also called Contracts for Di erence, these deals don’t involve physically delivering clean electricity to the buyer. A renewable energy generator sells green power wholesale, which the end user can purchase for a xed price. Producers reimburse the difference when the open market price for electricity exceeds the PPA, while the customer pays the producer when it’s the other way around.
What are the downsides to PPAs?
The drawbacks to PPAs are regulatory compliance, renewable energy technology limitations, and market uncertainties. Governments regulate them di erently because laws change per state, so what legally applies in one jurisdiction may be insu cient in others. Only some regions are friendly to PPA, so implementing them in other areas can be challenging or more expensive.
Regulatory Compliance
Take Massachusetts, for example. The Bay State permits PPAs, but proponents must overcome unique regulatory hurdles to construct and operate solar power installations. A signi cant portion of the Commonwealth’s undisturbed land is space marked for conservation, so the proposed solar farm sites will likely border protected areas.
Legal advice from construction environmental regulation attorneys familiar with a state’s speci c policies is necessary. The Department of Environmental Protection — the state’s ecological enforcement arm — can observe additional rules to supplement federal laws like the Clean Water Act and the Pollution Prevention Act to avoid costly and reputation-damaging violations.
Construction stormwater pollution control failure is a common infraction solar developers and contractors commit. In April 2020, Attorney General Maura Healey sued Dynamic Energy Solutions, LLC, and accused the developer of violating federal and state laws safeguarding wetland resources after building a hillside solar array above the West Branch Mill River.
The project allegedly uprooted trees, caused soil erosion, damaged streambeds, altered 97,000 square feet of wetlands, and covered the bottom of the river with more than an acre’s worth of sediment. The accused agreed to settle for $1.14 million less than a year later.
Moreover, the eligibility of PPAs is questionable in towns served by municipally owned electric companies.