Saturday, July 20, 2024

Selling your power: the evolution of the Power Purchase Agreement

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

Power Purchase Agreements (PPA) are not a new phenomenon, they have been used for many years to help organisations buy their power from renewable sources. However, as the prevalence of renewables has increased, the PPA market has had to evolve to meet demand, with new and innovative contract options that better reflect the UK’s transition to low-carbon sources of energy.

Putting this into context, in the early 2010s, renewables accounted for around 7% of the UK’s electricity generation mix while coal’s share stood at around 40%. By 2022, renewables exceeded a third of the electricity generation mix and coal’s share had been reduced to 1.5%.

This has led to the increased use of PPAs. In fact, in its latest ‘Corporate Energy Market Outlook’, published earlier this year, BloombergNEF revealed that 2023 marked the seventh year that the global corporate PPA market had reached a new high, largely as a result of a surge of activity across Europe, including the UK.

Many organisations have announced PPA deals with renewable generators, keen to reduce the risk from the energy market volatility we have seen in recent years, and hit their sustainability targets.

As a result, there is also a huge opportunity for independent energy generators – including those organisations with onsite assets such as solar photovoltaic (PV) and wind – to sell their power to corporate energy buyers through a PPA.

Beyond fixed or flexible

Over the past few years, we have seen PPAs evolve considerably, with increasing innovative structures and contracts beyond a simple ‘fixed or flexible’ choice.

For example, we now offer a wide range of PPA options for independent energy generators. These include our Flex Innovate PPA, which has all the benefits of a regular flexible PPA but with added features and flexibility, and the N2EX PPA, which enables a generator to trade its volume on the N2EX day-ahead auction. The Contracts for Difference (CfD) PPA is suitable for assets with a CfD greater than 5 MW as well as technologies which have been awarded the CfD, while our System Sell Price (SSP) PPA is an option for generation with sporadic output, or newly commissioned plant.

Which PPA is most suitable will depend on a number of factors, including the level of your annual output, the nature of your generation source, your risk appetite and ultimately, whether you want a steady and risk-free revenue stream, or wish to optimise profits with a flexible agreement.

All of the PPAs currently available have been developed to provide generators with multiple options so more of their energy can be procured by corporate energy buyers. The energy market is constantly changing, which naturally leads to more innovation in the way PPA contracts are developed.

The benefits of selling your power

There are a number of benefits to selling your excess power via a PPA:

  • Additional revenue – This will depend on the type of PPA, for example a fixed PPA provides a straightforward income stream and is protected from volatile energy market fluctuation, while a flexible PPA gives you control over when and how much power you sell over the course of the contract
  • Investor confidence – PPAs can cover an existing generation asset or provide assurance and confidence to investors in the financing of new renewable projects. So, if your organisation is considering investing in a renewable energy asset, then getting a PPA in place could help secure investment
  • Supporting the energy transition – with more and more businesses procuring their power from clean energy sources, independent generators have an important role to play in both meeting this demand, and contributing to the UK’s overall net zero strategy.

Supporting a secure and sustainable energy transition

What the past two years have taught us, is that the UK needs to accelerate its progress towards a homegrown, clean and secure energy system.

Independent generators will play a vital role in this, and PPAs provide the best route to market for their power. Today, constant innovation means that there are several options beyond a simple choice between ‘fixed’ or ‘flexible’.

That said, policy needs to support the development of more independent assets, either as primary businesses, or to enable the commercial and public sectors to install on-site generation to then be able to sell their excess power to other businesses.

From funding options to reducing planning red tape, there is more that can be done to unlock the power potential of independent generation over the next critical few years.

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This article appeared in the May 2024 issue of Energy Manager magazine. Subscribe here.

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