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”.
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
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".
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.
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.
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.
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?
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:
- 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;
- 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.
Fit for 55 - impact on PPAs
PPA EMIR reporting: products and services
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.
3 October 2019
25 June 2019
18 June 2019
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
PPA – a vehicle for utilities to become platform provider of renewable energy?, PwC
Power purchase agreements and cross-border price risks, White Paper 2020, DNV-GL
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
Power purchase agreement structures, WBCSD,
Corporate Renewable Power Purchase Agreements: Scaling up globally, WBCSD,
IFRS accounting outline for Power Purchase Agreements, WBCSD, January 2018
Corporate VPPAs: Risks and Sensitivities, Ben Grayson, Norton Rose Fulbright
video Backer McKenzie on PPAs
Micro Grid Sandbox Brooklyn