PPAs: key drivers in advancing the energy transition

The European Green Deal, for example, sets ambitious targets of reducing carbon dioxide emissions by 55% by 2030, and – if confirmed – 42.5% more renewables in the energy mix by the same year. This means that, on average, wind farms and solar plants with an installed capacity of 60GW need to be built each year to meet the Green Deal targets, a 270% increase in installed capacity.

China announced that it is aiming to reach net-zero emissions by 2060. This will require trillions more dollars to be invested in green and low-carbon industries.

To enable the transition, renewable energy investors and producers want certainty. They are looking for power consumers who will give their projects investment and price security to help get them off the ground. At the same time, a growing number of energy intensive industrial companies are seeking to procure electricity from renewable sources on a long-term basis as they look to decarbonise, in line with their sustainability strategies.

The vital role of PPAs

Long-term PPAs – electricity supply contracts between two parties – are a key facilitator of the energy transition and one of the most important areas of growth in the energy sector today.

By ensuring the necessary finance for renewable energy projects and making these projects more attractive to investors and plant developers, they are a key instrument in the fight against climate change, without or with partial need for subsidies.

Following the reduction or elimination of state subsidies and sharply falling production costs for new renewable production plants, PPAs for renewable energies have become a megatrend in many parts of the world, particularly in Europe.

The EU sees PPAs as a crucial tool in reaching its renewable ambitions as agreed under the ongoing revision of the Renewable Energy Directive III.

Since long-term contracts provide energy consumers, asset developers and investors with certainty and reduce the impact of short-term price fluctuations, PPAs have a vital role to play in the energy transition, and in particular the renewables-based decarbonisation of energy-intensive industries.

Not only do PPAs create security for investors and producers, but they offer industrial customers a long-term guarantee in obtaining renewable energy. At the same time, by purchasing electricity from renewable sources, those customers can reduce their carbon footprint. 

Corporate customers are increasingly aware of their social responsibility to manage their carbon footprints, making them more willing to engage in long-term PPAs in order to guarantee investors in new renewable assets a return on investment.

Indeed, some corporates are willing to pay a premium for the construction of new wind or solar production units to guarantee a supply of renewable energy over the long term.

So, by enabling the development of new green electricity generation without relying on subsidies, PPAs help power the energy transition and support the fight against climate change. Many renewable energy plants would not exist without them.

An evolving market

PPAs have been well established for many years, particularly in Scandinavia and the Iberian peninsula, with an increasing number also now being concluded in other European countries such as Poland, France, the Netherlands, Belgium, the UK and Italy. By contrast, Germany has not been such an attractive market for PPAs in the past, but this has been changing since the beginning of 2021 with the expiration of feed-in-tariffs based on the Renewable Energy Act, which came into force at the beginning of the year.

PPA solutions for the procurement of green electricity by corporate customers fall into two broad categories, depending on their needs: on-site and off-site.

Off-site solutions allow for procurement from any location, including projects in more profitable regions, such as wind power from Nordic countries, photovoltaic solar energy from southern Europe or Swiss hydropower.

On-site solutions offer the benefits of greater plant visibility which can enhance corporate brand reputation, and either a lower electricity price or return on investment since there are no grid costs. On-site PPAs are an ideal complement to off-site PPA procurement models.

PPAs differ from green tariffs, which simply confirm that a customer is consuming green energy, but with no link to a specific production unit. This can potentially lead to accusations of ‘greenwashing’. With PPAs, on the other hand, there is a specific link to a dedicated renewable energy production facility, which gives a higher level of assurance that the energy consumed is green and often locally produced.

Currently, PPAs are generally only feasible for larger corporates as contract negotiations are a time-consuming and complex process. In the coming years, however, we expect that PPAs will become more readily available to smaller consumers through the development of more standardised contracts.

Meeting EU Green Deal objectives

The European Commission is proposing to strengthen PPAs as part of the ongoing reform of the EU’s electricity market design, together with two-sided Contracts for Difference (CfDs) and deep and liquid forward markets. Together, these three instruments are expected to ensure more energy supply, with more homegrown renewable electricity generation in particular.

The targeted revision of the EU’s electricity market design is expected to enable the development of more long-term PPAs and unlock the investment needed to accelerate new power capacity buildout.

In its proposals published on 14 March 2023, the European Commission made some suggestions on how to boost corporate renewable PPAs so as to incentivise the scale of investment in renewables needed. These proposals have been broadly welcomed by the energy industry.

The reforms should remove all remaining regulatory barriers to PPAs and the lack of a standardised PPA contract template, according to the European Commission. They are also aimed at maximising the number of active players able to sign PPAs. On the demand side, the reforms should provide access to small and medium enterprises as off-takers. Governments and public banks, such as the European Investment Bank may have a role to play in underwriting PPAs and addressing challenges relating to off-taker’s credit risks.

Depending on a country’s regulatory framework, alongside CfDs and PPAs, purely merchant investments will be needed too. This is essential for electricity producers to meet their obligations under PPAs. Producers often need to buy electricity on the spot market to meet their obligations to deliver power to the off-taker under a PPA. This means they also need to sell some of their production on the spot market in order to have matching revenue.

It remains to be seen whether the EU will be able to adopt these reforms in autumn 2023; they may only come into force in 2024.

Pioneering projects

With the pioneering AlpinSolar facility at 2,500 meters in the Swiss mountains, Axpo became the first company in Switzerland to develop and successfully execute an entire PPA project. Elsewhere in Europe, Axpo Deutschland concluded the very first PPA in the German solar market back in 2019.

Axpo has set itself the goal of significantly increasing its long-term purchase and supply contracts for electricity from renewable energies and we continue to facilitate the use of PPAs across Europe and beyond, especially in markets heavily dependent on conventional fuels. 

For example, Croatia has recently seen its first ten-year PPA. This landmark deal, signed with Kunovac d.o.o. – a joint investment between the Finnish renewable energy fund manager Taaleri Energia and local developer ENCRO – covers almost 1.8TWh of green electricity produced at Croatia’s newest onshore wind farm in the Zadar region.

In Serbia, a renewable energy project co-owned by Serbia’s MK Group, and Slovenia’s ALFI Green Energy Fund will see the construction of a 105MW wind farm in Krivaca. This project too is underpinned by a long-term PPA.

Finally, in another significant step forward, in Germany leading silicon wafer manufacturer Siltronic has signed a long-term PPA to obtain solar power for its operations in Bavaria and Saxony at a fixed price and based on a fixed schedule, which will enable a predictable and reliable power supply.