Create additional green electricity through Power Purchase Agreements (PPAs)

The article provides an overview of the most fundamental elements and possibilities in a PPA and addresses how contracts can contribute to the green transition more generally.

PPA with additionality

An off-taker of electricity can enter a Power Purchase Agreement (PPA) with additionality with a developer of green energy. Ramboll refers to additionality in PPAs when the contract has the direct effect of adding new renewable energy capacity to the electricity system. The PPA will specify that the developer shall construct a new renewable energy plant, and that the off-taker undertakes to buy (offtake) electricity from this plant for an extended period of time. The off-taker is thus directly involved in the invention and development of the renewable energy plant, as the plant will not be constructed without the PPA.

By entering a PPA with additionality the off-taker contributes to further capacity in the market for green energy, which is the core purpose of the PPA. This makes a PPA with additionality different from a typical electricity purchase agreement, as a typical agreement will not demand the construction of a new renewable energy plant and bring additional green electricity. Even though it is possible to buy green electricity through a typical contract, an existing green production is just moved to a new buyer, and thereby not contributing to a net gain in the green transition.

Moreover, it is clearer in a PPA with additionality how the off-taker positively contributes to the green transition, which can easily be communicated to investors, customers, and other stakeholders. In one of Ramboll’s recent projects, the off-taker was able to obtain the naming rights for the renewable energy plant, adding a significant branding potential to the PPA as the off-taker will be able to associate its brand with the facility. These aspects also make it less difficult to document the fulfillment of the increasing sustainability rules, such as ESG.

The principle of freedom of contracts offers the opportunity to draft the PPA with additionality to suit the specific needs of the off-taker as well as the developer. Through the contract, the off-taker and developer will decide which type of renewable energy plant to be constructed to suit the off-taker's preferences and consumption patterns, for example a solar park, a hydroelectric plant, an onshore wind farm, or an offshore wind farm.

Amount of electricity and duration

The PPA shall specify how much electricity the developer must deliver to the off-taker. Ramboll has experienced examples where the off-taker has received the entire amount of electricity produced, a percentage of the amount of electricity produced, and a specific fixed amount of electricity from the renewable energy plant.

The PPA must also determine the contract duration. A PPA with additionality is a long-term commitment, where the duration of the contract usually is 5-15 years beyond the construction of the renewable energy plant. Furthermore, the parties can include options for contract extensions. The long-term contract is beneficial to both the developer and the off-taker. For the developer, it will be easier to have the construction financed, while the off-taker will be ensured to receive the agreed amount of green electricity during the period.

Remuneration

The PPA also needs to specify the pricing structure. Among the examples experienced by Ramboll are:

a) a fixed agreed price for the entire duration of the contract period,

b) a price partly dependent on the developer’s final costs for the construction,

c) a price following a day-to-day market price, and

d) a price following a specified price index.

If a) is chosen, the off-taker knows their electricity price for the agreed amount of electricity for the duration of the contract. Ramboll’s experience shows that pricing schemes, and the price itself, are most impacted by general market conditions.

Even though all prices in projects are confidential, we continuously add to our general insight into the competitive market prices in PPAs with additionality due to Ramboll’s involvement in numerous projects.

Types of PPAs

The PPA with additionality can be designed as either an on-premise, a physical, or a virtual agreement. In an on-premise PPA, the electricity is being transferred directly from the power generating source to the off-taker, for example by having the renewable energy plant constructed next to a factory. In a physical PPA the electricity is transferred to the off-taker through the public distribution grid, whereas in a virtual PPA the electricity is sold by the developer to the energy market.

Ramboll has seen examples of off-takers combining a physical and a virtual agreement while continuously adjusting the agreement to fit its intended purpose. By choosing any of the forms mentioned, the off-taker is certain to provide additional green energy. Even if the off-taker chooses a virtual PPA, it will count towards science-based targets under SBTi since virtual PPAs are accepted as a substitute for targets that cover scope 2 emissions.

Contracts contribute to the green transition

With the green energy transition continuing to push ahead at full speed, Ramboll expects the number of PPAs to increase. However, PPAs are just one example of how contracts contribute to the green transition. As the green energy sector continues to evolve and mature, the needs of the contracting parties will also evolve and mature, which necessitates that energy related contracts evolve and mature. This is reflected by the recent maturation of PPAs, and agreements related to CO2 storage, H2 offtake, and contracts of disconnection from the distribution grid.

Due to the constant development in technology and society the green transition has resulted in a situation with no status quo, which makes it difficult for the contracting parties to agree on the optimal form of contract. One thing is certain: It is possible to create additional green electricity through a contract and contribute to the green transition.