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New Energy World magazine logo
New Energy World magazine logo
ISSN 2753-7757 (Online)

PPAs are driving Europe’s energy transition

21/9/2022

6 min read

Feature

Aerial view over large solar park in Germany Photo: EnBW/Paul Langrock
PPAs facilitate investments in new renewable installations in Europe – the new Alttrebbin solar park in Germany commissioned by EnBW was subsidy-free

Photo: EnBW/Paul Langrock

Corporate power purchase agreements (PPAs) have become an important driver of the energy transition and also enhance energy security in Europe, explains Joop Hazenberg, Policy and Impact Director of the RE-Source Platform, Europe’s leading forum for direct renewable energy sourcing.

Just 10 years ago, direct sourcing of renewable energy through long-term contracts was a market in the margins. Today it is definitely big business – and growing fast.

 

Corporate PPAs have proven to be an important driver of the energy transition and enhancing energy security. They facilitate investments in new renewable installations in Europe, while complementing public tenders and providing renewable suppliers with stable and secure revenues. According to the European Commission (EC), PPAs have to play a central role in Europe’s strategy to achieve the European Green Deal renewable and climate targets.

 

The corporate PPA market is expanding rapidly across Europe, with more than 20 GW of cumulative installed capacity by 2022. That is a five-fold increase in comparison with 2016. In 2021 alone, nearly 8 GW of renewable energy capacity was contracted. For wind energy, 10% of new wind farm capacity financed in 2021 was supported by a corporate PPA.

 

The key PPA markets traditionally are concentrated in northern Europe, but this is changing fast. Spain is now the market leader, with 4 GW of capacity. This is remarkable given that PPAs only became viable after the Spanish government changed key laws in 2017. In the Nordics, Germany, the Netherlands and the UK, corporate sourcing is surging. Currently, PPAs are being signed in half of the EU member states. This will likely change soon as more barriers for PPAs have been taken away, for instance in Poland, Romania and Bulgaria.

 

Why have these energy contracts suddenly become so popular? What type of companies usually sign them? And can the corporate sourcing market grow further, or are there barriers on the road?

 

From Paris to Kiev
It is no coincidence that the rise of PPAs is mirrored by the decline in costs of wind and solar. They are strongly connected. Now that renewable electricity has become cost-competitive and in some markets much cheaper than power from fossil fuels, corporates want to make the shift to renewables to gain a competitive advantage.

 

But there is also a push from investors, consumers and politicians for companies to become more sustainable. Since the Paris Climate Agreement was signed in 2015, climate and energy topics have become top priorities on the agendas in board rooms across the globe. Hundreds of the largest companies in the world have signed up to the RE100 initiative to 100% match their energy demand with purchases of renewable energy. PPAs allow businesses to better track the energy they consume and demonstrate to their customers and investors their commitment to sustainability goals.

 

After the Russian invasion of Ukraine in February 2022, Europe has new pressing reasons to become energy independent. Home-grown renewable energies are a locally available solution and are less exposed to geopolitics than imported fossil fuels from Russia and elsewhere. The current energy crisis, caused by expensive fossil gas imports and the weaponisation of gas exports by Russia, has increased the prices for electricity dramatically. This has direct impacts on the production costs of European companies and in some cases might even threaten their international competitiveness. Through PPAs, companies lock in the price for sourcing renewable electricity over long periods. They make themselves more independent from geopolitics and market fluctuations, thanks to the price hedging feature of long-term energy contracts.

 

Decision-makers in the private and public sectors face the triple challenge of climate change, high energy prices and energy security. PPAs emerge as a key tool to tackle these challenges all at once. But it is not that easy. There are several limitations to this financial instrument, the main ones being the complexity of the contract, market circumstances and the regulatory environment.

 

A triangle of trust
The beauty of PPAs is that they provide the necessary guarantees for all parties involved when developing a renewable energy project, overcoming the hurdle of large upfront investments.

 

For the project developer, the long-term contract (often 10 to even 20 years) guarantees the purchase of the future electricity from the off-taker and a high certainty of revenue, unlocking cheaper capital in the form of loans from banks. The fixed price is beneficial for the buyer because they are shielded against price shocks and market fluctuations. And most importantly, the investor or bank involved in the project has assurances that there are low risks to provide financing. PPAs offer a triangle of trust.

 

But to ensure that all the risks are shared appropriately, long negotiations are needed, particularly if it is the first deal between the parties. A sound credit rating of the buyer is indispensable – and this is where the shoe pinches. Until now, PPAs are mainly signed by large corporates, the companies that feature in the Fortune 500 list – an exclusive club of buyers. For SMEs and organisations with smaller energy procurement and legal departments, the PPA trajectory can be daunting. Moreover, investors as well as suppliers will be hesitant to sign a deal if the credit risk of the buyer has not been officially established.

 

Thanks partly to standardised contracts for PPAs, the negotiating period has been reduced significantly over the past few years, to about six to 12 months. But this is still a far cry from signing up to a green electricity contract, using unbundled guarantees of origin (GOs) to validate renewable energy consumption. This only brings marginal benefits and has the least impact. Buying GOs does not lead to real additionality of renewables to the grid.

 

Innovations are taking place to make corporate energy procurement easier for companies, notably for SMEs. The EC has introduced specific guidelines to unlock the PPA market for all businesses as well as for public authorities. In some countries like France and Denmark, PPAs are now being signed by aggregated groups of smaller buyers. In Germany, RWE and Commerzbank are offering 5 MW PPAs specifically for SMEs. Local public authorities are also tendering for PPAs, for instance, Transport for London issued one in the summer of 2022.

 

Elsewhere, district heating providers are looking at the PPA model to develop ‘heat purchase agreements’. In Berlin, heat pumps that are powered with renewable energy provide heat for hundreds of thousands of households. PPAs will probably play a crucial role in the burgeoning renewable hydrogen economy. In the long run, they could underpin the 24/7 renewable energy system coupled with granular and time stamped GOs.

 

Unhealthy project pipelines
One of the major barriers to the development of the PPA market in Europe is the availability of new projects. At the current pace, the EU is only deploying half of the renewable energy needed to remain on track to meet the goals of the European Green Deal and the REPowerEU Action Plan. Governments must prioritise accelerating permitting procedures and remove grid and skilled labour bottlenecks – not just for PPAs, but for healthier renewable projects in general.

 

The Renewable Energy Directive (RED) from 2018 specifically demands that EU member states should open the PPA market, but most countries have until now ignored this part of the Directive. Together with the REPowerEU Action Plan, the EC published detailed guidelines on how member states can stimulate the PPA market. But this is still in its infancy in many EU member states.

 

There is, however, another barrier that prevents PPAs from becoming even more popular – the lack of issuance of GOs for all renewable electricity generation. These kinds of energy certificates are essential for PPAs because they provide traceability of generated electricity for the off-taker. They prove the link between electricity production and consumption and therefore underpin such long-term energy contracts. From a system perspective, GOs are the only way of truly ensuring renewable energy claims. GOs are the cornerstone of a trusted and transparent renewable electricity market in the European Union (EU).

 

Without GOs, there can be no PPAs. And without the PPA market growing much faster than it currently does, the EU will not be able to achieve its 2030 greenhouse gas reduction targets.

 

Sellers’ market
Another complicating factor is that the demand for PPA projects is outstripping supply, particularly since the Russian invasion of Ukraine. Some suppliers are getting so many requests they don’t have time to answer all of them. In addition, many projects are getting delayed because of the many supply chain issues that result from the post COVID-19 economic surge.

 

Prices of PPAs are therefore going up. While in 2021 PPAs were around €40–60/MWh, energy market analysts such as Pexapark have seen a surge in costs of PPAs in some markets to well over €100/MWh. Corporate sourcing has quickly become a sellers’ market. But PPAs remain attractive as electricity prices are skyrocketing, and the instrument guarantees real climate mitigation impact for off-takers.

 

Particular interest is coming from the energy-intensive industries. Large energy buyers such as chemical companies and aluminium producers are seeking ways to control their surging energy costs. Many of them are now simply switching off their production sites, instead of switching to renewables and electrifying their processes.

 

In order for the energy-intensive sectors to speed up their own energy transition, governments need to provide a stable regulatory and investment environment. However, what we now see in Europe are numerous ill-advised electricity market interventions that destabilise investment signals and dampen the PPA market – notably in Spain, Portugal and Greece. On a larger scale, a reform of the electricity market design as propagated by an increasing number of governments, and even the EC, could result in structural and long-term damage to the development of the direct sourcing market.

 

RE-Source Platform organises an annual event in Amsterdam (the next will take place on 6–7 October 2022) where it takes a deep dive in the PPA European market. Buyers of renewable energy attend for free.