In order to increase the stability and predictability of energy costs for market participants and thus counteract the negative effects of the energy crisis, the European Commission has made efforts to promote long-term private contracts concluded directly between producers and end consumers, i.e. PPAs/cPPAs. In this article, we outline the advantages of this legal solution and discuss the main barriers to the widespread use of PPAs/cPPAs.
(Corporate) Power Purchase Agreements – the main advantages
Power Purchase Agreements (PPAs) and Corporate Power Purchase Agreements (cPPAs), i.e. long-term contracts concluded directly between power producers and end customers outside of commodity exchanges, are an increasingly common phenomenon not only worldwide, but also in Poland. We informed you about the advantages of these contracts for the wind industry, among others, in the entry: What’s happening in the Polish wind energy industry? PPAs/cPPAs are an increasingly common way of contracting energy, guaranteeing consumers a fixed energy price and producers a fixed revenue for the entire duration of the contract. It is possible to conclude a PPA/cPPA even before the generator builds its RES source, which can make it much easier for the investor to obtain commercial financing for the project. This is because the prospect of a guaranteed steady income for the next dozen or so years ensures the credibility of the investment in the eyes of a bank or other financing institution.
PPAs/cPPAs are a tool to reduce electricity purchase costs and meet the company’s increasingly important sustainability goals. It is worth pointing out that PPAs/cPPAs allow consumers to access cheaper energy from RES – either by purchasing energy at lower prices on the basis of a PPA/cPPA with physical delivery, or through settlements carried out on the basis of a so-called virtual PPA/cPPA, under which the producer pays the consumer the excess of the market price over the price level assumed in the contract (the so-called strike price). In either case, the customer can obtain guarantees of origin to demonstrate a reduction in its carbon footprint.
The role of public authorities in the dissemination of PPAs/cPPAs
The advantages of PPA/cPPAs are pointed out, among others, by the European Commission, which emphasises the promotion of this type of contract in its proposal published on 14 March 2023 for a regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 and Directives (EU) 2018/2001 and (EU) 2019/944 with a view to improving the structure of the EU electricity market. The Commission’s proposal is to require EU Member States to make such regulatory changes that facilitate the widespread conclusion of PPAs/cPPAs.
The European Commission points out that PPAs/cPPAs are currently available mainly to large energy consumers. A barrier to the widespread use of these contracts, especially in the small and medium-sized enterprise (SME) sector, is the increased risk of these entities defaulting on their payment obligations over the relatively long (up to 15-25 years) duration of the contract. To address this problem, Member States should, in the view of the European Commission, ensure that instruments are available to mitigate the financial risk of customer default, especially for those entities facing barriers to entry into the PPA/cPPA market.
Furthermore, in the European Commission’s view, EU Member States have instruments at their disposal to support the development of the PPA/cPPA market, especially when designing and awarding public support. Allowing RES project developers participating in tenders for public support to reserve part of the energy generated for sale through PPA/cPPA would promote the spread of such contracts. Furthermore, according to the European Commission, Member States should seek to apply criteria whereby priority would be given to bidders who have committed to sign a PPA/cPPA for the supply of part of the energy generated by the project to buyers who face difficulties in accessing the PPA/cPPA market.
PPAs/cPPAs are an increasingly common way of contracting energy, guaranteeing consumers a fixed energy price and generators a fixed income for the entire duration of the contract. The prospect of a fixed income for the next several years or even several decades ensures the credibility of the RES installation investor in the eyes of financing institutions, making it easier to obtain commercial financing for the investment. So far, the beneficiaries of PPAs/cPPAs have mainly been large energy consumers. However, it should be expected that this model of cooperation between market participants will become more widespread with the emergence of legal instruments promoting the use of PPAs/cPPAs.
Norbert Czerniak, Lawyer
Karolina Barałkiewicz-Sokal, Attorney-at-law (PL)