What is a Power Purchase Agreement? A Guide to PPAs

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Explore the essentials of Power Purchase Agreements (PPAs), their role in green energy, and how they benefit both producers and consumers.

What is a Power Purchase Agreement? A Guide to PPAs

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It probably shouldn’t be a surprise to learn that a business area such as renewable energy, which is more dependent than most on innovation, has come up with plenty of ways to incentivise customers to make the switch to renewable energy, and one of the most effective and mature is the Power Purchase Agreement. 

A Power Purchase Agreement (PPA) is a contractual agreement between energy buyers and sellers. They agree to buy and sell energy generated by a renewable asset. PPAs are usually signed for a long period between 10 and 20 years and have become highly prevalent in the UK energy market. 

Types of Power Purchase Agreements

There are several different types of PPA, and which one your business may be best suited to will be dependent upon your specific circumstances: 

On-site PPAs

PPAs are called “on-site” when renewable energy production facilities are installed on a client’s site. In this case, energy operators fund equipment design, installation, and operation. Clients who are site owners or tenants consume the energy that is produced. 

Off-site PPAs

PPAs are said to be “off-site” when energy production equipment is not installed on a client’s premises. Nonetheless, these contracts are “physical” when clients agree to buy a given quantity of green energy produced by a well-defined renewable energy facility from an energy provider.  

What Are the Advantages of Off-site PPAs?

Off-site PPAs are more suitable for companies with meaningful renewable energy goals that cannot be met with onsite renewable energy installations alone, whose utility options are either unavailable or unattractive, or who have insufficient onsite renewable energy options and seek greater flexibility. 

Virtual PPAs

Just as with physical PPAs, with virtual PPAs, clients commit to buying a quantity of electricity from an energy supplier but do so on the wholesale green energy market. Still, in this case, the energy consumed by the client is not linked to a defined site. Operators of this type of contract can more easily invest in new green energy infrastructures, selling and making use of the electricity that their clients have bought on this market, while clients# benefit from a fixed long-term rate and guarantees of origin of renewable assets while continuing to be supplied by their operator. 

Certainty (fixed) PPA

Certainty PPAs give you budget and income certainty, as your generation income is fixed at contract signature and not exposed to wholesale market fluctuations. This gives you assurance in a volatile energy market, helping you deliver to your budget and, should you require it, helping you put together a sound investment case. The main benefit is that before your contract starts, you are clear about the income you will receive throughout your contract.

Flex PPA

A Flex PPA is a variation of a PPA that divides the projected yearly production of the solar system by 12 months and determines a fixed monthly price for the property owner. Despite varied production rates throughout the year, your monthly payment will not change. After a pre-agreed amount of time (often but not always five years), Flex PPAs give the property owner the legal right to buy the remainder of the contract and own the solar system if they want. This programme essentially allows for a “lease to own” solar energy system pipeline. It prevents property owners from paying increased or unpredictable monthly payments they may experience in a regular lease or PPA. 

Clarity (index) PPA

Clarity PPAs meet the needs of generators who can control their output with their own view on market prices and are looking for a market-reflective price for their output. This contract enables you to maximise your output but retain flexibility in how and when to forecast your output. Volume tolerances are agreed upfront so that you are clear on your contractual obligations before you commit.

Choice (index to fixed) PPA

The Choice PPA recognises that output can be variable and enables you to choose a price for it in periods when it is more predictable. Different volume tolerance levels are available, and prices paid are linked to a published wholesale market index. 

Benefits of Solar Power Purchase Agreements

PPAs are designed to save you money, ideally as soon as the PPA is signed and the system goes online. Because energy rates through PPAs are about a third of traditional energy rates, you can expect to realise immediate savings with a PPA. But be cognisant of any escalators in the PPA contract to ensure you're getting a good deal. They also offer businesses a degree of certainty over their energy pricing going forward. 

How PPAs Work

The specifics of your PPA journey will differ according to your exact circumstances, but broadly, you should find that it looks something like this: 

  1. Implement, and develop your project with a PPA, and determine the structure of the contract. You may find that a full energy audit helps to establish your exact needs. 

  2. Create a Request for Quotation and contact partner installers. Remember to get more than one so that you can compare them.

  3. Compare the offers received. The devil may be in the details regarding these contracts, so check everything you receive. 

  4. Negotiate the terms. Installers may have a degree of flexibility over the 

  5. Sign the PPA contract. Remember that this is a legal contract and that you should only sign it when you’re certain it’s what you need!

  6. Manage your energy sales and risk throughout the life of your asset. High-tech solutions, such as Energy Management Systems, can substantially reduce your workload.

How to Sell Your Energy With a PPA

A power meter records your site's generation volume and, where applicable, the consumption associated with it. There are two types of metering systems: half-hourly or non-half-hourly metered, though non-half-hourly meters are to be phased out by March 2026. 

As its name suggests, a half-hourly meter registers readings every 30 minutes, giving you a better view of your power export and consumption. These readings can be taken automatically and recorded online. Where a non-half-hourly meter is installed, you may need to take monthly readings manually instead.

If you set up a half-hourly meter, you will also need to arrange contracts with a Data Collector (DC) and a Meter Operator (MOP). You can get these from your current supplier, but it’s always best to shop around to ensure you’re getting the best deal. Your MOP will be responsible for installing and maintaining your meter and ensuring the data can be sent to the DC. The DC then sends the data to your contracted supplier.

Getting a Power Purchase Agreement in the UK

You can take steps to ensure that you secure a PPA. Be sure to start early. Three to six months before you intend to make the switch would be considered normal. If you’re unsure of this process, you can use a reputable broker or intermediary with good market knowledge and a proven track record. Ensure you know in advance what your needs will likely be and what your business case looks like. The more preparation you put in, the greater the likelihood that your experience will be seamless.  

How Can a Solar PPA Reduce My Business's Carbon Footprint?

As solar panels use sunlight to generate electricity, the process produces zero carbon emissions, making it a clean and sustainable energy source. By integrating Solar PPAs into their energy strategies, businesses can substantially decrease their reliance on fossil fuels, which are a significant driver of carbon emissions. 

With such a plethora of options available, agreeing to a PPA can seem daunting at first. Doing so can protect national grid infrastructure and help offset the overhead costs of installing a solar array while enhancing your business reputation and perhaps even your bottom line. It’s time for your business to embrace this future and commit to a more sustainable future!

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