Renewable energy is definitely not a ‘new’ technology anymore.
Maybe a few years ago it was – but now? We have strong foundations, knowledge, and successful exploitation of different sources.
We’ve reached a point where it’s more a case of ironing out kinks and continuing on incredible work.
One way in which large consumers are financing their investments into renewable power is through something called Power Purchase Agreements (PPAs).
Continue reading to find out more!
Power Purchase Agreements (PPAs)
To help finance investment into renewable power, many suppliers are offering Power Purchase Agreements (PPAs) to consumers above a certain size. These are essentially agreements where consumers agree to buy renewable energy directly from a producer.
These come in two forms:
On-site PPA: Project developers will install infrastructure on the consumer’s site, feed electricity into the consumer’s installation who will then pay a certain price for that electricity. There is no use of the public grid to transport electricity in this case.
Off-site PPA: Consumers will buy electricity directly from a renewable energy producer located outside of the end-use facility. The public grid is used to transport electricity.
The viability of off-site or on-site PPAs really depends on local regulations, cost level, resource availability, and industry type/operational scale.
For the most part, on-site PPAs will be able to generate massive savings per MWh for consumers – but this is mostly limited to smaller volumes. For larger volumes of electricity, off-site PPAs will generate smaller savings (but will have a much larger impact because of volume).
With energy prices currently going a little bit…mental, fixed price off-site PPAs have been presented as a savvy opportunity to generate savings. Although with the current crisis hitting consumer confidence to invest, once the markets have stabilised, we will likely see a return to this practice.
There does remain a slight concern that once markets begin to fall that these agreements will no longer be competitive. As such, it is imperative to be knowledgeable of the subject and have an energy transition plan in place.
For off-site PPAs there is a range of jargon to be aware of. Here are some distinctions that will help you tell them apart:
- Location of delivery point: If this happens to be the exit point – the connection of the end-consumption facility to the grid – then it means that the Power Purchase Agreement seller will handle the transportation of electricity over the transport grid. This can create issues with having two suppliers on one connection point.
Due to this, must off-site PPAs will specify delivery on the entry point – the connection of the production site to the grid. What this means for consumers is that you will either have to integrate PPAs into physical supply contracts (a practice called sleeving), or settle financially by selling PPA electricity at the entry point to subsequently buy it back at the exit point.
- Power profile: For most Power Purchase Agreements, the energy will be delivered as a profile. Production profiles will not coincide with consumers consumption profile, which in turns means consumers will have to continuously buy or sell from the spot market.
For many countries, low wind will still mean high prices and high wind low prices – which means the balancing of both profiles (consumption and production) over the market can lead to high costs.
A simple alternative would be to buy the PPA power as a capacity block. However, this does come with a higher associated risk for the supplier and can include a massive risk premium being included in the PPA pricing.
- Balancing: When balancing, the amount of energy that consumers are able to buy structurally from the grid and how much can be included (or not) in the PPA agreement.
Consumers should exercise caution when it is included as they be agreeing to forego the opportunity to sign better contracts elsewhere. Some ‘all-inclusive’ PPAs can prioritise locking consumers into long term contracts.
- Fixed-price: Many PPAs will be presented as fixed price offers. Alternatives are spot indexation with a discount.
Market-based pricing is often limited to the downside with floor prices, or on both sides with ‘collar prices’.
- Single country or cross-border: In case of a financial settlement, consumers are able to buy electricity from one country to sell in that country’s spot market, only to buy it back again from their local spot market.
In extreme cases, consumers may even consider buying all of their energy needs from one single cross-border PPA. Setting up this type of deal may have negative consequences for accounting, and forms risk on the spread of prices between two countries.
These are all very important differentiations to be aware of and should be taken into account when looking to make use of Power Purchase Agreements. Which type is most suitable for your business will ultimately depend on the business energy transition plan/strategy.
The renewable energy transition will forever change the way consumers buy energy – be it large, small, or domestic consumers. There likely won’t be a similar ‘explosion’ of research into different exploitable sources, more so a continued honing of production and supply practices.
From the supplier/consumer point of view – this will most likely take the form of additional complexity within contracts, and further scope for different combinations.
Four step transition
Define the plan. A business should make their renewable energy goals set in concrete, while also being realistic. A combination of stakeholder analysis and internal assessments should help provide an idea of what is attainable and in what fashion. At this point it is also possible to determine what different technologies you would like to implement, and in what capacity.
Align plans. In the second stage, a business should align its renewable energy plans with its ‘overall’ energy price risk profile. Different sized businesses will prioritise different things here, budget-risk clients will be more set on stabilising their energy costs over the long-term, while market-risk clients will be prioritising not having a fixed price PPA in a bearish market.
Align with the finance department. This is where businesses will find what instruments are acceptable from the finance department’s point of view. Realistically, PPAs with financial settlements or cross-border PPAs will hold entirely different costs and revenue lines. It is therefore essential to discuss these upfront to avoid any disappointment further down the line. It is not uncommon for late-stage deals to falter because the price management structures are not acceptable for the business.
Assess potential. In the fourth and final stage, businesses should try to assess the potential within all their sites (worldwide) for PPAs. The best energy transition plans include proper decision-making processes, with tables, responsibilities, and workflows for decision making.
Niccolo Gas – For all your gas products
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Well, those businesses who had partnered with a reliable energy supplier like Niccolo Gas on flexible energy contracts will have been left much less exposed to current events than others.
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