Asset management

Power Purchase Agreement: relaunch renewable energies without incentives.

Photovoltaic energy production is a sector in which investors, despite substantially constant growth, have cyclically shown moments of great enthusiasm and moments of great discouragement, most of the time according to the energy policies of the states in which the production of this type of energy was required.

After a period in which countries with advanced economies have infused large amounts of money into the market through a lot of incentives. Private investors have wondered if it was still worthwhile to focus their money on renewables and in particular on photovoltaics.

Then something happened. A cultural evolution has brought a change of pace also in the photovoltaic industry: companies all over the world began to understand that the sustainability of their business is a principle for customers and investors that are more and more interested in environmental protection and what’s more it is an important driver in commercial terms and in terms of value creation.

The turning point occurred in 2014, when one hundred large companies from all over the world joined the RE 100 association with the aim of reaching the use only of energy produced from renewable sources in their factories and offices within just a few years. Investors realized that sustainability makes businesses more attractive on the market by putting sustainability first and creating a measurable milestone system. When technology companies focused on renewable sources as the main source of their energy, a favorable market sentiment was created which quickly involved partners, associations and investors.

In this context PPA contracts for long-term electricity supplies have started to spread in some markets, such as the US, Mexico and Chile.

What is a PPA and which are its advantages

A Power Purchase Agreement is a long-term electricity supply agreement between two parties, usually between an electricity producer and a consumer or distributor of electricity. PPAs define in detail all the terms and conditions for the sale and purchase of electricity including the volume of electricity to be supplied, the negotiated prices, the balance between production and consumption and the penalties for breach of contract. It is a bilateral agreement, therefore it can take various forms and be adapted to the parties by reducing the risks related to market prices, in particular where there are large consumers of electricity and important investments planned for the construction or maintenance of renewable energy plants.

Mainly, as we said above, the PPA allows to reduce the risks related to changes in the price of energy on the markets, however there are numerous advantages in entering into purchase contracts in the free market: long-term price security, the possibility of financing investments in new production capacities, the reduction of risks in the sale and purchase of electricity, the most advantageous conditions for purchasing energy, the possibility of delegating responsibility for participation in the markets as regards the use  of the national distribution network. 

In the latter case, by taking advantage of the ability to generate forecasts and the experience of trading in the markets, it is possible to eliminate the heavy imbalance costs for the producer, who therefore manages to earn more and to return more quickly from the investment. The producer will also be incentivized to invest in maintenance, in the modernization of the systems and in all those technologies that allow to keep the photovoltaic energy supplies always within the quantity and quality parameters established by the contract.

It is easy to understand how it will be possible to relaunch the photovoltaic and renewable energy sector in general through the Power Purchase Agreements, giving new vitality to a market too often at the mercy of the moods (and incentives) of sovereign states.