Renewables power purchase agreement is defined in Article 2(17) of Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (recast).

According to this provision it means “a contract under which a natural or legal person agrees to purchase renewable electricity directly from an electricity producer”.

         
          
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More descriptive delineations see power purchase agreement (PPA) as an agreement between an offtaker and a renewable energy developer that allow the offtaker to purchase power directly or indirectly from the developer on a longer term basis for a price level agreed by the parties, where the main participants typically are:

  • renewable energy developers,
  • corporate offtakers,
  • utility companies (responsible for the power distribution), and 
  • lenders.


The duration of the contract ranges between 1 and 15 years although in the Nordics some of the longer deals include Norsk Hydro’s 29-year PPA from Övertungen in Sweden and Alcoa’s 40-year PPA with Landsvirkjun in Iceland (see "Changed trading behaviour in long-term power trading, An analysis of the recent development in power purchase agreements in Norway", the Norwegian Energy Regulatory Authority (NVE-RME), 6 January 2020).

 

The same source also mentions that in the Nordics "the power associated with a PPA is transferred through the power grid as any other power. The power traded through the PPA is registered as a trade on the market exchange to allow for the market clearing and balancing. Depending on the structure of the PPA, the one responsible for ensuring sufficient power delivered will buy additional power on the exchange and vice versa for the consumed power".

 

VPPA

 

 

The are also virtual PPAs (VPPAs) where both parties agree on a fixed strike price while the developer’s role is to deliver power to the wholesale grid and sell electricity at spot price.

Furthermore, the offtaker purchases power from the wholesale market at spot price and the settlement takes place through contract for difference (CfD) - the CfD is settled with the use of the fixed strike price and the spot price at wholesale market.

 

Hence, The VPPA is a purely financial contract where the project developer exchanges floating price cash flow for fixed-price cash flow and sometimes renewable energy credits (as the transfer of guarantees of origin (GOs) may additionally occur).

 

Sometimes the project company and corporate offtaker also split the wholesale revenues to the extent they exceed the fixed price payments.

 

 

Profile of volume

 

 

The aforementioned document of the Norwegian Energy Regulatory Authority (NVE-RME) of 6 January 2020 gives also some background information as regards the volume’s structures applied in the PPA Nordic market.

 

It observes, in principle the power delivered in a PPA is typically either delivered “as produced” or as baseload.

 

For either option, someone needs to match generation with consumption either through the market or by controlling production or consumption - this responsibility can be given to the producer, consumer or a contracted third party (“as produced” is common for wind and solar farms and is most attractive to developers of these type of projects since it removes some of their risk.

 

If this power is to be purchased by the consumer, it needs a third party with sufficient flexible generation sources, such as hydropower, which can be used to match the demand.

 

The market for utility PPAs is largely driven by the need of the developer to remove some of their production risk.

 

This risk is then acquired by utilities with larger portfolios who can shape the power into baseload. Some larger energy producers or consumers take on the balancing and shaping responsibility themselves.

 

Typically, they will have a department working full-time with balancing or hold the necessary assets to ensure the preferred shaping.

 

For smaller producers or consumers, it is more often preferred to designate a third party that provides shaping services for a fee as part of their business.

 

In practice, shaping is often done by the shaping party by optimising the production and consumption side separately and trading residual production and consumption with the market exchange.

 


Balancing responsibilities

 

 

As regards balancing on the Nordic market balancing responsibility towards the TSO can appear on both the producer and consumer side of the grid connection.

 

The balancing responsibility often lies with the consumer who is responsible for balancing their consumption in relation to the baseload purchase.

 

In practice, this is often done by a third party for a fee.

 

The balancing responsibility becomes even more important in cross price zone PPAs. In these cases, producers or third parties with a large production portfolio in both price zones are useful.

 

The producer or third party will turn up production in one price zone and down in another to ensure balancing.

 

This will make it more cost-effective to be the balancing responsible.

 


Accounting treatment

 

 

PPAs face special accounting treatment and may fall into leasing (IFRS 16), embedded derivatives (IFRS 9) or non-derivative (IAS 37) categories. Tax incentives/subsidies may also have accounting impacts. The correct accounting treatment can ensure that the PPA procurement will not impact the profit and loss statement (PnL) - see the Decision Tree for PPA Accounting Treatment at “PPA – a vehicle for utilities to become platform provider of renewable energy?”, PwC.


 

Sleeved PPA

 

 

A specific variant of a standard PPA is sleeving/third party netting, i.e. a PPA between a licensed supplier and a producer, which links the generation directly to the customer (it is used by non-residential producers or prosumers wanting to sell electricity directly to a final customer).

 

Practically, in a sleeved PPA after both parties (the developer and the off-taker) enter into contract the off-taker appoints a utility to act as its agent and sleeve the power, in exchange the off-taker pays the sleeving fee.

In the main part of the deal the developer delivers power physically according to contract and the off-taker pays for power at the agreed price. Excess power is sold to the grid.
In addition, the transfer of guarantees of origin (GoOs) usually takes place.

 

European energy market regulators (Regulatory Aspects of Self-Consumption and Energy Communities, CEER Report, Customers and Retail Markets and Distribution Systems Working Groups, 25 June 2019, Ref: C18-CRM9_DS7-05-0, p. 17) observe that in this instance the role of a licensed supplier is to emulate a peer-to-peer trade sharing arrangement by taking the electricity in question into its balancing perimeter and delivering it to the final customer. In this respect, the involved supplier manages the imbalance risk of the exchange.

 


Qualification under REMIT

 

 

Some PPA contracts are reportable under REMIT regulations, in such a case qualifying businesses (contract for the delivery of more than 10MW of electricity, 600GWh per year) must register as market participants and report their electricity transactions to ACER every month. 

According to the ACER, in case of PPAs with defined pricing, delivery point, billing and payments conditions, which are not traded at an organised market place. the contract will be reported under Table 2 and, following the billing, the executions specifying an outright volume and price will be reported no later than 30 days after the invoicing date, using Table 1 of the Annex to Commission Implementing Regulation (EU) No 1348/2014 (ACER's Frequently Asked Questions (FAQs) on REMIT transaction reporting, Question 3.1.43).

 

Nevertheless, it needs to be noted that according to Article 3(1)(a)(vii) of Commission Implementing Regulation (EU) 1348/2014, contracts for the supply of electricity or natural gas to a single consumption unit with a technical capability to consume 600 GWh/year or more are reportable to the Agency.

Consequently, if the technical capability of the consumer to consume is less than 600 GWh/year, which means that the contracts are not reportable under REMIT - if the consumer uses the purchased energy solely for own consumption and not for resale.

The said circumstances may have a meaning when assessing the PPA’s status under REMIT reporting rules see ACER's clearance of 30 April 2021 (Question 3.1.53, FAQs on transaction reporting).

 


ACER's Frequently Asked Questions (FAQs) on REMIT transaction reporting

Question 3.1.53 (published on 30 April 2021)

We are enabling a corporate PPA between a consumer and a generator. The consumer does not have an individual consumption unit >600GWh but the applicable generators capacity does exceed 10MW.
We are not contracting direct with the generator but are registering the export meters to our supply.
We will be the registered supplier of the consumer. In terms of cashflow we will be paying the consumer who will in turn pay the generator for the generation.
What, in your opinion, would be the best way to report this?

We think it could be either of the following:
1. We report transaction(s) with the consumer with the generator as beneficiary
2. Consumer reports transaction with Generator only If option 1 is applicable, and we report both sides of the transaction(s) through our designated RRM, would this mean that all 3 entities have met their reporting requirements or would the generator and consumer still need to submit their own reports?

If it turns out option 2 is the recommended approach, is it possible for us, as a 3rd party, to submit reports on behalf of both the generator and the consumer?

Answer

Based on your description we understand that there are two contracts concluded in your example:

1. a power purchase agreement concluded between the Consumer and MP A to purchase renewable energy from the generator

2. a supply contract concluded between the Consumer and the Generator MP A and the generator have no contractual relationship.

According to Article 3(1)(a)(vii) of Commission Implementing Regulation (EU) 1348/2014, contracts for the supply of electricity or natural gas to a single consumption unit with a technical capability to consume 600 GWh/year or more are reportable to the Agency.

Based on your description we understand the technical capability of the Consumer to consume (being involved in the above-mentioned two contracts) is less than 600 GWh/year, which means that the contracts are not reportable under REMIT.

Please be aware that this conclusion applies only if the Consumer uses the purchased energy solely for own consumption and not for resale.

For further information related to the application of Article 3(1)(a)(vii), please refer to Questions III.3.18, III.3.20, III.3.22, III.3.33, III.3.42, and II.4.44 in the Q&A document available on the REMIT Portal.



PPAs vs. financial future market

 

 

Economic interests satisfied by the PPAs can, theoretically, to some extent, be realised also on the financial futures market.

 

However, using PPAs, instead of futures, to source the hedging needs have several advantages.

 

As observed in the said document of the Norwegian Energy Regulatory Authority (NVE-RME) of 6 January 2020, the cost of putting in large bids in the future market is quite high and attempting to purchase or sell a PPA of e.g. 100 MW over 10 years would be quite expensive.

 

Market participants that seek to hedge 50+ MW might circumvent the financial hedging market also to avoid moving the market price - in principle, individual trades in the financial market should not have an observable effect on the price, however, putting in a bid which is much larger than the market depth available might be very expensive since they can significantly affect the market price of the futures. This risk is avoided by using PPAs instead.

 

Given the above circumstances, financial future market is primarily used for shorter term hedges up to five years, whereas the PPA market is used for longer term hedges.

 

 

Regulatory barriers to PPAs

 

 

Further spreading of PPAs may be hampered by some regulatory barriers still present across the EU member states.

 

According to the NVE-RME they can be grouped as follows:

  1. curtailment of renewable energy can be necessary in many countries due to grid capacity limits; however, in some member states it is not clear whether there will be given compensation for reducing the production of a power producer, this is a challenge for, e.g., wind and solar producers looking to sign a deal for delivery of electricity;
  2. the risk of losing compensation from increased indirect carbon cost when entering into a renewable energy PPA - the EU member states can grant compensation for the increased power price due to a higher ETS price, however, in some member states electricity through a renewable energy PPA is thought to be unaffected by the ETS price, signing such a PPA is therefore at the risk of losing compensation.

 

At the level of individual EU member states different tax regimes and legal systems can be an issue when engaging in a PPA.

 

Other obstacles are related to the number of buyers per installation and the number of suppliers per metering point, which makes PPA syndicates more complex.

Besides that, there are also limitations in the current GOs-systems.

                                                                  quote                                                                                                                              
      


Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (RED II), Recital 90

Renewable liquid and gaseous transport fuels of non-biological origin are important to increase the share of renewable energy in sectors that are expected to rely on liquid fuels in the long term. To ensure that renewable fuels of non-biological origin contribute to greenhouse gas reduction, the electricity used for the fuel production should be of renewable origin. The Commission should develop, by means of delegated acts, a reliable Union methodology to be applied where such electricity is taken from the grid. That methodology should ensure that there is a temporal and geographical correlation between the electricity production unit with which the producer has a bilateral renewables power purchase agreement and the fuel production. For example, renewable fuels of non-biological origin cannot be counted as fully renewable if they are produced when the contracted renewable generation unit is not generating electricity. Another example is the case of electricity grid congestion, where fuels can be counted as fully renewable only when both the electricity generation and the fuel production plants are located on the same side in respect of the congestion. Furthermore, there should be an element of addit­ionality, meaning that the fuel producer is adding to the renewable deployment or to the financing of renewable energy.

 


Fit for 55 - impact on PPAs

 

                                                                  quote        


Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (RED II), Article 15(8)

Member States shall assess the regulatory and administrative barriers to long-term renewables power purchase agreements, and shall remove unjustified barriers to, and facilitate the uptake of, such agreements. Member States shall ensure that those agreements are not subject to disproportionate or discriminatory procedures or charges.

Member States shall describe policies and measures facilitating the uptake of renewables power purchase agreements in their integrated national energy and climate plans and progress reports pursuant to Regulation (EU) 2018/1999.

 

 

  

quote                                                                                                                                              
            
 
 


European Commission Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2018/2001 of the European Parliament and of the Council, Regulation (EU) 2018/1999 of the European Parliament and of the Council and Directive 98/70/EC of the European Parliament and of the Council as regards the promotion of energy from renewable sources, and repealing Council Directive (EU) 2015/652, COM(2021) 557 final

Recital 9

The market for renewable power purchase agreements is rapidly growing and provides a complementary route to the market of renewable power generation in addition to support schemes by Member States or to selling directly on the wholesale electricity market. At the same time, the market for renewable power purchase agreements is still limited to a small number of Member States and large companies, with significant administrative, technical and financial barriers remaining in large parts of the Union’s market. The existing measures in Article 15 to encourage the uptake of renewable power purchase agreements should therefore be strengthened further, by exploring the use of credit guarantees to reduce these agreements’ financial risks, taking into account that these guarantees, where public, should not crowd out private financing.

Article 3 is amended as follows:



the following paragraph 4a is inserted:

‘4a. Member States shall establish a framework, which may include support schemes and facilitating the uptake of renewable power purchase agreements, enabling the deployment of renewable electricity to a level that is consistent with the Member State’s national contribution referred to in paragraph 2 and at a pace that is consistent with the indicative trajectories referred to in Article 4(a)(2) of Regulation (EU) 2018/1999. In particular, that framework shall tackle remaining barriers, including those related to permitting procedures, to a high level of renewable electricity supply. When designing that framework, Member States shall take into account the additional renewable electricity required to meet demand in the transport, industry, building and heating and cooling sectors and for the production of renewable fuels of non- biological origin.’

Article 15 is amended as follows:

[…]

(c) paragraph 8 is replaced by the following:

‘8. Member States shall assess the regulatory and administrative barriers to long-term renewables power purchase agreements, and shall remove unjustified barriers to, and promote the uptake of, such agreements, including by exploring how to reduce the financial risks associated with them, in particular by using credit guarantees. Member States shall ensure that those agreements are not subject to disproportionate or discriminatory procedures or charges, and that any associated guarantees of origin can be transferred to the buyer of the renewable energy under the renewable power purchase agreement. Member States shall describe their policies and measures promoting the uptake of renewables power purchase agreements in their integrated national energy and climate plans referred to in Articles 3 and 14 of Regulation (EU) 2018/1999 and progress reports submitted pursuant to Article 17 of that Regulation. They shall also provide, in those reports, an indication of the volume of renewable power generation supported by renewables power purchase agreements.’;

(d) the following paragraph 9 is added:

‘9. By one year after the entry into force of this amending Directive, the Commission shall review, and where appropriate, propose modifications to, the rules on administrative procedures set out in Articles 15, 16 and 17 and their application, and may take additional measures to support Member States in their implementation.’

 

 

 

 

 
881675D1 E2BF 4DEA 8CFC F3AA7A5DCE15   
    PPA EMIR reporting: products and services

 

 

 

 

TMF - Group

 




The above list contains the links to products and services relative to the EMIR reporting. The list is provided for informational purposes and the administrator of Emissions-EUETS.com assumes no responsibility for its usage.
 

 

 

 

 

 

 

 

 


chronicle   Regulatory chronicle

 

 

 

 

3 October 2019

 

New toolkit launched to accelerate corporate sourcing of renewables in Europe

 

Re-Source, Introduction to Corporate Sourcing of Renewable Electricity in Europe

 

25 June 2019

 

Regulatory Aspects of Self-Consumption and Energy Communities, CEER Report, Customers and Retail Markets and Distribution Systems Working Groups, Ref: C18-CRM9_DS7-05-03

 

18 June 2019

  

EFET publishes the standard form for Corporate Power Purchase Agreement

 

 

 

 

 

IMG 0744   Documentation

 

 

 



Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (recast), Article 2(17)


Pricing structures for corporate renewable PPAs, WBCSD

https://www.wbcsd.org/Programs/Climate-and-Energy/Energy/REscale/Resources/Pricing-structures-for-corporate-renewable-PPAs

 

PPA – a vehicle for utilities to become platform provider of renewable energy?, PwC

https://www.pwc.de/de/energiewirtschaft/ppa-a-vehicle-for-utilities-to-become-platform-provider-of-renewable-energy.pdf

 

Power purchase agreements and cross-border price risks, White Paper 2020, DNV-GL
https://brandcentral.dnvgl.com/fr/gallery/10651/others/e415ee34b1974bc58b0d8c8c984ead28_hi.pdf

 

Quarterly Report on European Electricity Markets with focus on corporate power purchase agreements and residential photovoltaics, DG Energy, Volume 13, issue 3, third quarter of 2019

 
Changed trading behaviour in long-term power trading, An analysis of the recent development in power purchase agreements in Norway, the Norwegian Energy Regulatory Authority (NVE-RME), 6 January 2020

https://www.copenhageneconomics.com/dyn/resources/Publication/publicationPDF/5/535/1590392515/copenhagen-economics_changed-trading-behaviour-in-long-term-power-trading.pdf

 

Power purchase agreement structures, WBCSD,

https://www.wbcsd.org/contentwbc/download/4468/60118

Corporate Renewable Power Purchase Agreements: Scaling up globally, WBCSD,

https://www.wbcsd.org/contentwbc/download/4468/60118

 
Virtual PPA contracts - qualification under MiFID and its consequences, Tadeusz Zieliński

 
Reporting Virtual PPA contracts under EMIR, Tadeusz Zieliński

 

IFRS accounting outline for Power Purchase Agreements, WBCSD, January 2018
http://docs.wbcsd.org/2018/01/IFRS_accounting_outline_for_PPA.pdf

 

Corporate VPPAs: Risks and Sensitivities, Ben Grayson, Norton Rose Fulbright 

https://www.projectfinance.law/media/5551/pfnw-june-2020.pdf

 

 

 

 

clip2   Links

 

 

 

 

 

EFET standard form for Corporate Power Purchase Agreement


Corporate Renewable Power Purchase Agreement, France Energie Ecolienne

 
video Backer McKenzie on PPAs

https://video.bakermckenzie.com/embed?id=2c2c708e-e245-47ae-9503-7e621ab213d0

 

Renewable Energy Buyer’s Toolkit

 

REMIT reporting - Power Purchase Agreements (PPAs)


Optimising Energy Procurement via Corporate PPAs, PwC

 

European Corporate Sourcing Directory

 

Piclo

https://piclo.energy

 

sonnenCommunity 

https://sonnengroup.com/sonnencommunity/

 

Vandebron 

https://vandebron.nl/energie

 

Micro Grid Sandbox Brooklyn 

https://www.brooklyn.energy

 

RE100