Savings on the electricity price<\/strong><\/p>\n Electricity offered through cPPAs is usually cheaper than electricity offered by retailers and traded at energy exchanges. The differences can reach up to several tens of percent.<\/p>\n<\/div><\/div><\/div> Long-term hedge of electricity price<\/strong><\/p>\n cPPAs are the only realistic option to fix the costs of energy purchases in the long term (more than five years). Higher predictability of costs positively impacts companies regardless of their scale and industry.<\/p>\n<\/div><\/div><\/div> Meeting green energy targets<\/strong><\/p>\n cPPAs are globally approved measures for the realization of green energy targets. Moreover, this type of contract is prioritised in the European regulations and widely used by global players in almost all energy-consuming (and not only) industries.<\/p>\n<\/div><\/div><\/div><\/div><\/div> While the savings from the cPPA are important from a business perspective, they are the backdrop to the entire contract, which is primarily aimed at hedging the risk of electricity prices and supplies. The main value for the recipient is the defined effective price of electricity covered by the contract during its term.<\/span><\/p>\n<\/div><\/div><\/div> cPPAs, despite their huge potential related to green energy and possible savings, aren\u2019t the easiest contracts to tackle from the accounting perspective. This relates especially to virtual cPPAs, which are financial instruments, and as such, they need to be presented at fair value on each reporting date.<\/span><\/p>\n<\/div><\/div><\/div> Therefore, despite the many benefits of cPPAs, it is important to recognise the complexity of the process and the challenges involved. Contracts require proper goal setting and preparation for the negotiation process. When those risks aren\u2019t properly addressed in a contract, they may result in financial loss and \u2014 in the long term \u2014 the loss of control over electricity costs.<\/span><\/p>\n<\/div><\/div><\/div> A power purchase agreement (PPA) is a contractual agreement between energy buyers and sellers. They come together and agree to buy and sell an amount of energy which is or will be generated by a renewable asset. PPAs are usually signed for a long-term period between 10-20 years.<\/p>\n<\/div><\/div><\/div> Corporate Power Purchase Agreements (cPPAs) are long-term contracts for the purchase of electricity from renewable energy sources (RES), i.e. photovoltaic and wind farms, concluded directly between energy producers and corporate consumers. The location of the energy source is also not a limitation, as agreements can be in-border or cross-border.<\/p>\n<\/div><\/div><\/div> A physical PPA contract is a contractual agreement where the asset and the offtaker are in the same grid network. This means that there is a physical transfer of the energy \u2013 contrary to a virtual PPA. A third party such as a utility is appointed to manage the electricity delivery on behalf of the project. This implies that the physical aspects, such as balancing , need to be included in the contract.<\/p>\n<\/div><\/div><\/div> That\u2019s another common term used for a Financial PPA. It is treated as a financial instrument, often based on the International Swaps and Derivatives Association (ISDA) contract.<\/p>\n<\/div><\/div><\/div> This is one of the many PPA volume\/contract structures, although not a common one It represents a structure where the agreement is around the peak hours of consumption from Monday to Friday. All-day is typically from 8am to 8pm.\u00a0 So, the buyer only commits to buying energy for their consumption during these hours. There are different blocks to pick from, such as off-peak \u2013 i.e., purchase power for night load only.<\/p>\n<\/div><\/div><\/div><\/div><\/div> Offtaker<\/p>\n<\/div> In a PPA deal, it\u2019s the party that buys the energy, also known as the buyer. It\u2019s the purchaser who buys power from a project developer without taking ownership of the plant.<\/p>\n<\/div> Corporate<\/p>\n<\/div> A non-utility, non-trader consumer of electricity. Industrials are often referred to as corporates, but the difference is that industrials\u2019 energy needs are significant, and energy costs are directly linked to the cost of production.<\/p>\n<\/div><\/div><\/div><\/div><\/div>\n In an annual baseload PPA, the buyer agrees to buy a determined volume of energy for every hour over the year. Profile and volume risks sit with the seller, because they have to deliver the agreed energy no matter what. If there\u2019s low production and the seller cannot meet its obligations through its plant, the agreed volume will be sourced from the spot market.<\/p>\n<\/div><\/div><\/div> In this commercial structure, the buyer agrees to pay a pre-agreed amount of electricity for every hour of each month. This way, the seller is taking into consideration the seasonal variability of production. The difference between the produced volume and the contracted volume is settled at the spot market.<\/p>\n<\/div><\/div><\/div> The acronym stands for Commercial Operation Date. It\u2019s an important date for PPAs, because it marks when the project can start selling its output.<\/p>\n<\/div><\/div><\/div> Renewable production volumes that are committed for delivery within a PPA agreement. Depending on a buyer\u2019s needs, they may want to contract the entire volume (100%) or part of it (i.e., 50%).<\/p>\n<\/div><\/div><\/div> It refers to the rate at which photovoltaic panels degrade over time. For instance, a producer might estimate production volumes with a degradation assumption of 2% per annum, which means that every year the solar panels output 2% less electricity than the year before.<\/p>\n<\/div><\/div><\/div> It\u2019s the technical assessment of the expected annual energy yield of a planned power plant. It\u2019s carried out by an engineering firm and plays a crucial role in the volume a plant can commit to selling.<\/p>\n<\/div><\/div><\/div> The acronym stands for environmental, social and governance. ESG are non-financial factors to identify a company\u00b4s sustainability and societal impact. In recent decades in financial markets, special attention has been given to companies with an ESG focus, for instance funds that invest in carbon-neutral companies. In Fixed Income markets, some special bonds (called \u2018green bonds\u2019) were issued specifically to finance green projects. Financial data vendors have also developed benchmarks and indicators to track the ESG performance of individual companies.<\/p>\n<\/div><\/div><\/div> When a power plant is merchant, it is exposed to the volatility of wholesale electricity markets. It\u2019s exposure, also known as merchant exposure, depends on how much volume it has contracted under fixed-price instruments. If a generator expects an annual output of 10GWhm and has contracted 6GWh through a corporate PPA, its exposure is 4GWh. Exposure is also known as revenue risk.<\/p>\n<\/div><\/div><\/div> The difference between forecasted, often on a day-ahead basis, and actual realised production of a plant.<\/p>\n<\/div><\/div><\/div> A guarantee of origin is an electronic document with the purpose of proving the origin of energy to the customer in such a way that a certain share of the electricity used for its consumption was produced from a certain primary energy source.<\/p>\n<\/div><\/div><\/div>Challenges of PPA<\/strong><\/span><\/h2><\/div><\/div><\/div>
PPA (Power Purchase Agreement)<\/h2><\/div>
cPPA (Corporate Power Purchase Agreement)<\/h2><\/div>
Physical PPA<\/h2><\/div>
Virtual PPA<\/h2><\/div>
Peak load PPA<\/h2><\/div>
<\/i><\/i><\/span>Annual Baseload PPA <\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>Monthly Baseload PPA <\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>COD<\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>Contracted volumes <\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>Degradation<\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>Energy Yield Assessment<\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>ESG factors <\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>Exposure<\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>Forecast inaccuracy<\/span><\/a><\/h4><\/div>
<\/i><\/i><\/span>GoO or GO<\/span><\/a><\/h4><\/div>