Power Purchase Agreements (PPAs) or bilateral contracts for the purchase-sale of electricity are very new contracts still in Spain, but which generate great interest especially among investors in renewable energies. These contracts have their conditions set out by the parties in the long term with a fixed or variable price, and do not involve any physical exchange, since they can be treated as a financial product.
There are PPAs for energy, green certificates or power, where the buyer agrees to pay for a volume of energy contracted, regardless of whether it is consumed or not, and also PPAs where there is no final purchase option but it is a pure financial lease. There are also other arrangements.
In order to solve all the doubts that may arise from this innovative contract modality, which is particularly attractive for renewables, which are moving in a changing environment, Ateneo de Energía has held a new day with the attendance of 100 professionals from the energy sector such as: Mari Paz García Alajarín, EU-Energy Management of EDP Renovables; Ubaldo Yáñez, director of Voltiq Spain; Jorge Álvarez Vitores, Head of Consultancy of Enertis; Miguel Marroquín, CEO of Our New Energy; And Piet Holtrop, partner of Holtrop Transaction & Business Law.
Balance between the parts of the PPAs
The experts pointed out that the challenge of this type of agreement lies in finding a balance between the parties involved. For example, for the seller, they noted that it represents an opportunity to achieve a long-term price, that makes their project profitable, and with the PPA, a constant cash flow is guaranteed.
Experts in the day of the Ateneo de Energía
In this case, the risk of this type of operation lies in the stipulation of a price, taking into account the variable market and the costs of development of the project. It is also important to rely on the counterpart for being a solid company, Ateneo de Energía said in a statement.
In the case of the buyer, marking a closed price in the long run is also an advantage, since he knows his costs. In addition, as was pointed out on the day, they can get tax incentives as a company acknowledged for fighting against climate change, in compliance with the legislation of the country where the PPA operates. The biggest risk, for its part, is finding a suitable company as a counterpart, that does not have environmental problems, for example, and properly calculating the costs, due to the long-term expectations.
Appropriate PPA Structure
Another challenge to be solved is the search for an appropriate PPA structure, for which flexibility between the parties is essential: each must shoulder their own risks. Sometimes to get a multiple structure, a portfolio of projects helps, as risks are shared and minimized, the note continues.
Likewise, agreements are also made on the basis of a fixed or variable amount, adjusting to a rate above or below the system, and taking into account other risks such as legislative changes. Obviously, due to market volatility, the trend will be favorable to one or the other party at different times, so it is not feasible to cover all cases when developing the agreement, the experts advise.
PPAs awarded through tenders or auctions
PPAs currently dominating are those granted through tenders or auctions, and “the trend suggests that contracts will begin to close with a shorter-term guarantee, because a long-term contract is more difficult to obtain due to the agreements needed with financial institutions” the statement notes.
It also emphasizes that, given that it is an evolving market, it suggests that more sophisticated and complex financing structures will be required, and that financial institutions will tend to adapt.
“The energy auction that has recently been launched in our country, which auctioned a power with the right to a specific remuneration regime, bodes well for a surge in the PPAs interest. This is because the auction guarantees a reasonable return revised on each regulatory period, which represents a great deal of uncertainty in terms of a legislative change. This uncertainty is what gives PPAs an advantage by reporting similar returns with long-term profitability” they explain.