In a context characterized by the disappearance of the incentives previously expected for renewable energy, the PPA (Power Purchase Agreement) are the perfect tool to guarantee conditions of financial stability appropriate to their business plan to those who want to invest in the production of photovoltaic energy. However, it is necessary to have a clear vision not only of their nature, but also of the various forms with which this type of contract is entered into.
Legally a PPA is an energy purchase contract in which a person (producer) sells the electricity produced by his plant to a person who takes advantage of it on the market. The latter person, who’s called trader or wholesaler, assumes the status of dispatching user and he becomes the interface between the production unit and the national electricity distribution network (for example in Italy it is Terna SpA). With this type of agreement, in fact, the buyer provides a series of services to the producer such as the management of imbalances, the definition and daily transmission of offers on the market, the management of the economic flows deriving from the sale of energy and the withdrawal of GOs (Guarantees of Origin).
On the other hand, the producer is structurally exposed to the risk of trader’s insolvency as a consequence of the postponed payment of the production of a given period. Knowing the types of existing PPA will allow, for example those who have invested in a photovoltaic energy production plant, to better protect themselves by choosing a contract with suitable guarantees in terms of risk sharing between the parties.
Classification on Power Purchase Agreement
Although there is no regulatory classification, we can divide PPAs into two main categories: physical and virtual ones.
The former have in common a precise definition of the quantity of electricity sold and of the quantity of electricity to be supplied by contract. Depending on the mode of supply, they are divided into:
PPA on-site provides for a direct physical supply of electricity, therefore physical proximity between producer and consumer is mandatory. The production plant must be located behind the consumer’s counter (technically “behind the mate” or BTM), for example on the company’s website.
With an on-site PPA charges such as the network fees for the electricity produced by the plant aren’t applied because this kind of electricity is not supplied through the public network. The main advantage is the ad-hoc sizing of the plant since it is based on the consumer’s energy profile. The electricity generated with an on-site PPA directly reduces the consumption of a company therefore all on-site PPAs are also corporate PPAs.
PPA off-site: there is no physical supply of electricity between the plant and the consumer. The contract provides for the balanced purchase of a certain amount of electricity produced. Compared to the “on-site” version, the manufacturer supplies electricity through the public grid, therefore the injection must be further managed between the balancing groups of the plant and the consumer. This results in greater flexibility since the plant manager is not obliged to build near the end user and he can choose locations with optimal conditions for the installation of his wind or photovoltaic system.
The price of the electricity supply is negotiated in the PPA. In this way all participants enjoy the advantages of long-term price security, and the grid operator continues to receive the charges and fees due. Green certificates generated with the production of electricity are usually transferred to the customer.
Sleeved PPA: it is an off-site PPA in which an energy service provider acts as an interface between producer and consumer. Possible tasks include the management of the balancing group, the grouping of different electricity producers in a portfolio of plants, the supply of residual quantities of electricity or the sale of surplus energy, the preparation of injection forecasts, the marketing of green certificates or the assumption of various risks (e.g. the costs for balancing energy or the risks of default of a contractual partner).
Virtual PPA (also called SPPA or Synthetic PPA) separates the physical flow of electricity from the financial one ulike the physical PPA described above. Producers and consumers agree like previously on a price per kilowatt hour of electricity but, in this case, electricity is not supplied directly by the production plant to the consumer because it is the trader who enters the electricity produced in his own balancing group and who markets it, for example, on the spot bag. This strategy is typically supplemented by a so-called “contract for difference”, i.e. an agreement in which the parties undertake to pay additional finance compensation if the price of electricity flows differs from the bilaterally negotiated price. Thanks to this double payment track, each of the partners manages to obtain security on price trends.
Price security or the possibility of reducing risks in the sale and purchase of electricity are only some advantages of the Power Purchase Agreements which can contribute significantly to make profitable investment in renewable energy combined with the constant progress of the technologies involved in the construction and management of production plants.