PPA for Offtaker - Utility PPA

  • Utility Power Purchase Agreements (Utility PPA) are standardized contracts which can be closed between the owner of a renewable energy assets and a utility / energy trader acting as the offtaker. However, a Utility PPA can also be closed between a corporate or public institution and a utility / energy trader acting as a supplier.
  • Utility PPAs can be divided in Green Tariffs and Green Premiums. The first is a long-term contract for energy-intensive clients while the latter has a short-term tenor for medium and small companies as well as the residential sector.
  • Utility PPAs can deliver bundled EACs but the offtaker’s sustainability largely depends on the liquidity and investment strategy of the utility / energy trader.

 

Global Overview for Green Utility PPAs

Utility Power Purchase Agreements (Utility PPAs) are defined as standard contracts between a utility or energy trader (sometimes called Merchant PPA) and an electricity-consuming offtaker (e.g. corporate or public institution) for the delivery of electricity under a certain price scheme. In the context of renewable energy, Utility PPAs are contracts covering the delivery of renewable energy provided by the utility and the corresponding Energy Attribute Certificates (EACs) devalued by the utility on behalf of the client for documenting and proving the origin of renewable energy.

The first major problem from a buyer’s perspective is that Utility PPAs cannot deliver 100% renewable power physically unless the utility or energy trader generates or buys its sold energy solely from renewable energy plants. The second major problem is that a buyer is unable to directly induce a renewable energy plant to be build and connected to the grid. There are two major types of Utility PPAs:

  1. Green Tariff Programs
  2. Green Premium Programs

Both categories look largely similar on the first view but are different in terms of contractual structure and their potential to prove sustainability from the perspective of electricity consumers.

Global Overview for Green Utility PPAs (Green Tariffs & Green Premiums)    Disclaimer: The countries shown in the table do not imply any acceptance, advise, or endorsement by Think RE GmbH     Source: Think RE GmbH, © Think RE GmbH

 

 

 

The map shows that green Utility PPAs are largley implemented in developed energy markets while rarely available in emerging and developing countries.

 

According to estimates of the International Renewable Energy Agency (IRENA), approximately more than 34 TWh of renewable energy sourced by corporate offtakers are annually provided by Utility PPA in 39 countries which equals 0.14% of global renewable energy generation.

 

Green Tariff Programs

Green Tariff Programs are normally long-term power purchase agreements in which a utility or energy trader is obliged to physically purchase at least exactly the same amount of renewable energy and the corresponding EACs which are sold to electricity consumers. Green Tariffs are normally contracted by larger corporate clients, especially from the sectors like Healthcare, Real Estate, and Telecommunication. These long-term agreements were developed in response to the growing renewable electricity demand from large-scale corporate customers enabling them to purchase renewable electricity from a specific asset through a long-term utility contract similar to a PPA

Green Tariff Scheme    Source: Think RE GmbH, © Think RE GmbH
Note: SPV = Special Purpose Vehicle, IPP = Independent Power Producer, EAC = Energy Attribute Certificate 

Note: P2 > P1; P2 > P3; EAC-Prices normally bundled in PPA-Prices

As shown in the graph, the utility or energy trader may purchase the green energy from its internal own renewable power plants or from external sources like wind parks or solar farms. In both parts of the upstream value chain, the underlying Utility PPAs also includes bundled EACs. In the downstream part, the EACs are devalued by the utility or trader on behalf of the offtaker under a Green Tariff Utility PPA. Whether the sold physical electricity is green (100% Renewable Energy) or grey (Fossil Fuels are still included) depends on the operated electricity portfolio of the utility or the energy trader. Therefore, utilities are increasingly founding subsidiaries that are only operating renewable energy assets in order to reliably prove that the delivered electricity is sourced 100% from renewable energy plants. However, the graph shows that the PPA price invoiced to the offtaker (P2) normally exceeds the prices from upstream PPAs (P1) or internal calculated prices (P3) due to the utility or trader margin.

 

Green Premium Programs

Green premium programs are contracts between an utility or energy trader and small-scale commercial and industrial customers as well as residential consumers. These contracts have normally short-term tenors between one to three years. The offtakers pay a cost premium as an extra line item on their electricity bill rather than paying a fixed PPA price comparable to Green Tariffs. In contrast to Green Tariff Programs, utility or energy traders are allowed to only purchase unbundled EACs and not necessarily a physical amount of renewable energy. Thus, the generation mix used to provide the green power can be intermittently changed by the utility. Green Premium Programs incur additional costs to the offtaker on top of their prices for physically delivered electricity. Thus, offtakers are unable to save and fix their cost of electricity over a longer time horizon.

Green Premium Scheme    Source: Think RE GmbH, © Think RE GmbH
Note: SPV = Special Purpose Vehicle, IPP = Independent Power Producer, EAC = Energy Attribute Certificate 

Note: P4 > P1, P2, P3

The utility or energy trader purchases EACs from either, secondary ECA markets or from Independent Power Producers or even own renewable energy assets as part of the upstream value chain. Under Green Premium Programs, the EACs sold to the offtaker are unbundled and devalued by the utility or energy trader since there is no obligation for utilities or energy traders to physically deliver renewable energy under Green Premium schemes. The EAC price (P4) invoiced to the offtaker exceeds the portfolio upstream price, defined as the volume-weighted average price of P1, P2, and P3. The excess amount is added to the invoice and does also contain the margin of the utility or energy trader. In sum, Green Premium products provide only a limited opportunity for offtakers to prove their sustainability and manage their costs of electricity.