New guides on power purchase agreements, templates and roadmaps have been released by the Business Renewables Centre. Here is why they’re timely.
Over the past 18 months, there has been a lot of corporate and public sector interest in Renewable Energy Power Purchase Agreements with solar and wind farms.
Under a RE PPA, buyers make a long-term agreement to pay a fixed price for the electricity and/or green certificates from a wind or solar farm. RE PPAs can be a powerful tool to reduce greenhouse emissions, exposure to volatile electricity prices, and electricity bills.
Given the enormous falls in the cost of solar and wind farms and the rising price of electricity, many organisations are becoming more proactive in their energy management strategies and considering RE PPAs.
The basic concept seems simple – but there’s a lot of jargon: “virtual”, “modified virtual” and “sleeved” are just some of the terms used to describe RE PPAs. Many find them confusing and the transaction costs can be significant.
Wholesale or Retail PPAs?
A study by UNSW found there are theoretically 288 different types of PPA – but for most organisations the threshold choice is between a Wholesale PPA (directly with a solar or wind farm) or a Retail PPA (buying from a solar or wind farm via a retailer).
The standard Wholesale PPA is a financial contract known as a “contract-for-Difference”– it has no relationship with the consumer’s retail electricity supply agreement.
The two parties agree on a fixed ‘strike price’ for the PPA and each month one party pays the other based on the difference between the PPA and wholesale electricity prices.
So, if the strike price is $70 a megawatt hour and the wholesale electricity price is $90 a MWh, the project pays the buyer $20 a MWh. They are sometimes called a “green hedge”. If a buyer has a RE PPA equivalent to 20 per cent of their demand and the wholesale electricity price increases, they receive income from the RE project which partly offsets the increase in their electricity prices for the rest of their demand.
Under a retail PPA, the buyer still receives electricity and/or green certificates from the solar or wind farm at a fixed rate – but the retailer holds the agreement with the developer and manages the contract. The retailer provides the balance of supply at a second, different rate to the PPA.
What drives different buyers to choose a wholesale or retail PPA? Some of the key factors are administrative simplicity, market options, value and accounting considerations.
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The early deals were generally wholesale PPAs by larger buyers such as Bluescope Steel but the market is quickly diversifying into Retail PPAs to meet demand. Recent cases of retail PPAs include Ascham Girls School, South Sydney Regional Organisation of Councils and Anca Manufacturing.
Around 45 RE PPAs are known publicly to have been negotiated – and industry reports there are many more at different stages of development. One of the key barriers to the growth of RE PPAs is the transaction costs (many parties report lengthy deal making processes).
PPA Templates for Buyers
The Business Renewables Centre-Australia has released new guides on PPA deal types and templates for a PPA tender and term sheet to help simplify PPAs for new buyers.
These include a Buyers Roadmap with a step-by-step guide that unpacks the process of how to do a PPA with supporting resources for each stage.
Three new resources have been released for organisations interested in doing a RE PPA:
- A Deal Structures primer – which explains the differences between Wholesale and Retail PPAs in more detail and also outlines other types of PPAs;
- a Request for Proposal template – which includes a schedule of the key provisions that could be included in an Expression of Interest or Request for Proposal for a RE PPA.
- a Term Sheet Template – which includes a list of standard terms that could be included in a term sheet to negotiate a RE PPA.
Both templates are designed to be used as starting points for buyers (rather than an industry standard) – but over time there will hopefully be a move towards greater standardisation for RE PPAs to make them simpler to negotiate.
Chris Briggs and Jonathan Prendergast, technical directors, Business Renewables Centre-Australia. The Business Renewables Centre-Australia is a not-for-profit Initiative established by WWF, Climate-Kic and the Institute for Sustainable Futures, the University of Technology with funding from the Australian Renewable Energy Agency and the NSW and Victorian Governments.
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