Friday, July 19, 2024

Fixed or Flexible: Which Power Purchase Agreement is the right route to market for your power?

Vish Sharma, Head of Power Purchase Agreements at npower Business Solutions

Energy is a hot topic at the moment, particularly in terms of how the UK can accelerate the move to a safe, sustainable and secure energy system. As such, the Department for Energy Security and Net Zero (DESNZ) recently announced a raft of consultations and measures designed to put the UK on the right path to energy independence and a zero carbon future.

At the same time, businesses have been grappling with increased energy costs while also looking at cost-effective ways to ramp up their sustainability plans. The public sector is no different – from education to healthcare, organisations have had to navigate higher energy prices during a time when finances are already tight, while also demonstrating their commitment to the UK’s net zero ambitions.

As a result, many are considering new ways to reduce their energy consumption while also lowering emissions. One option that is becoming popular is installing sustainable on-site energy generation as a way of mitigating energy risk and hitting sustainability targets.

Another benefit of investing in an on-site asset is that it could also generate additional revenue, through selling excess power to eager corporate buyers via a Power Purchase Agreement (PPA).

How to sell your power to businesses

PPAs are contracts that agree energy production output and its subsequent purchase. They are made between asset holders who generate renewable power and commercial buyers. In short, they are a valuable route to market for generators to sell their power. 

As an established method of managing energy sales and risk in generation projects, PPAs encompass all the commercial terms required to deliver a route to market for generation. They include start date, delivery schedules, pricing mechanisms, and payment terms and can include renewable certificates such as Renewable Obligation Certificates (ROCs) and Renewable Energy Guarantees of Origin (REGOs). They are usually valid for several years and offer pre-set or to-be-determined prices for energy purchases.

A PPA can cover an existing generation asset or provide assurance and confidence to investors in the financing of new renewable projects. PPAs can therefore be agreed upon before a project becomes fully functional.

To fix or flex?

PPAs typically offer either fixed or variable pricing arrangements.

A fixed price PPA:

  • Sets an upfront, guaranteed price for each unit of power you export
  • Provides a straightforward income stream, protected from volatile energy market fluctuations
  • Offers competitive prices with the reassurance of regular, reliable payments
  • Has agreed prices for typically between 6-36 months
  • Is typically suited to smaller asset portfolio holders looking to cover their own overheads and sell the excess power.

A flexible PPA:

  • Gives you control – you determine when and how much power you sell over the course of the contract
  • Tracks the wholesale energy market to capitalise on price peaks and high demand
  • Allows generators to benefit from real-time guidance via our award-winning Optimisation Desk and secure Risk Navigator portal
  • Is ideal for generators with sporadic output and larger or growing asset holders
  • Has the option of sophisticated flexible agreements for more advanced sellers

When it comes to selling your power, deciding which PPA is best can be complex and is based on a range of factors, including:

  • Annual output: fixed PPAs can be a good choice for generators with a limited annual output. However, if your annual output is 6 GWh or more, flexible PPAs could offer a better route to market
  • The nature of your generation: some renewables, such as biomass power, offer a steadier output regardless of weather conditions. Others, like wind and solar PV, are more intermittent and weather-dependent
  • Your time constraints and risk appetite: the energy market is complex, and your familiarity with it can be a deciding factor when choosing the best PPA for your asset
  • Your organisation’s objectives: whether you want a steady and risk-free revenue stream or wish to optimise profits with a flexible agreement, your goals will ultimately determine which PPA is best for you.

Making the most of your energy asset

Embedding independent energy generation – including those installed on-site on commercial and public sector premises – into the UK’s wider energy infrastructure ultimately improves the reliability of our renewable energy supply and supports the growth of homegrown clean energy.

These generators can also help organisations procure their power from renewable sources, particularly when availability from the national grid is in increasingly short supply.

For more support on the best routes to power for your asset, npower Business Solutions’ latest guide for energy generators can be downloaded here.

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