Beyond the Jargon: Power Purchase Agreement Explained

In today's energy market, Power Purchase Agreements (PPAs) are an established way of hedging against future volatility by purchasing energy at fixed, competitive prices.

At CFP Energy, we’re trusted specialists in securing PPAs. To discuss your options, contact our energy team today. 

The UK is now the fourth largest European market for PPAs, with some of the country's leading businesses, including Tesco, Sainsbury's, M&S and Nestle, having already signed up to PPAs as part of their decarbonisation strategy. 

However, confusion around PPAs continues to persist. Some businesses are unsure of whether this type of contract represents a safeguard against price volatility, while others may be uncertain about how PPAs align with their climate strategy. This article will break down the different types of PPA available and how each can directly benefit your business.

Understanding Power Purchase Agreements

PPAs are a way of buying power at a known rate over a fixed period, usually between 5 and 30 years.

The benefits of doing this are twofold: PPAs offer a hedge against future volatile power prices by securing a fixed energy price for a set period, while signalling a commitment to sustainability due to their emphasis on green energy, such as wind and solar power.

Providing both sustainable energy and protection against price volatility, PPAs are an ideal solution to fulfilling two separate needs – all within a single integrated contract.

The Power of Partnership: How PPAs Work in Renewable Energy

Although some PPAs are still based on conventional fuels (e.g., coal, oil), over the past decade, renewable energy PPAs have dramatically increased in popularity. At present, they now represent the majority of new PPA contracts being signed globally. 

One of the outstanding issues with renewable power- whether from wind or solar - is their high upfront capital costs. By signing a PPA with an off-taker or supplier, companies avoid the upfront costs.

This, in turn, helps mitigate the pain points that often disincentivise companies from investing in green energy projects.

A further benefit of PPAs, in this scenario, is their verifiability. Power Purchase Agreements backed by renewables provide proof of renewable energy consumption - demonstrating regulatory compliance and voluntary CO2 reductions in one go.

Types of PPAs - Unpacking Different Agreement Structures

The three main types are sleeved, physical, and virtual/synthetic.

Sleeved PPAs are a type of energy contract where an intermediary utility company handles the transfer of money and energy to and from a renewable energy provider. 

Physical PPAs are a type of power purchase agreement where the customer pays the price agreed within the PPA contract and receives the Guarantees of Origin (GO).

Virtual or Synthetic PPAs, meanwhile, specify a contract in which the generator and an off-taker agree to settle the difference between a fixed price and the market price of electricity. 

PPAs vs. IPPs - Understanding the Key Differences

An Independent Power Producer (IPP) is a company or entity that generates electricity independently from national utilities. They typically own and operate power plants to produce electricity, often for sale to utilities or directly to end users. 

This is distinct from PPAs that are contractual agreements between a power producer and a buyer, rather than a defined entity that produces the power.

In some cases, where a buyer wants more control over their power supply, without necessarily possessing full ownership, an IPP may be preferable.

However, in cases where a business simply wants to receive its energy at a stable price, with provisions to supply a certain quantity of renewables, PPAs will be more appropriate.

A further benefit of PPAs is that they are adaptable. This type of energy provision might include a tailored mix of energy sources, such as a customised ratio of renewables to fossil fuels, depending on the buyer’s needs. IPPs, by contrast, are usually restricted in their offering, providing with a fixed source of energy without the flexibility

In contrast, traditional IPPAs often involve more direct delivery obligations and less market interaction, creating a more closed system between producer and buyer.

The Pros and Cons of PPAs

Disadvantages of PPAs

Long-Term Commitment

The long-term nature of PPAs (typically 10-25 years) can be a disadvantage for businesses that prioritise short term flexibility.

Market Dependence

The buyer must be in a competitive electricity market to benefit from PPAs.

Buyer Demand Thresholds

Where power is supplied remotely, offsite PPAs require the buyer to have sufficient energy demand to match most, or all, of the project’s generation capacity.

Advantages of PPAs

Cost Stability

By locking in a fixed price for energy over the term of the agreement, PPAs guarantee price stability over the contract period, typically 10-25 years.

Access to Renewables

For many organisations, especially those without the infrastructure or capital to invest in renewable energy systems, a PPA provides an accessible pathway to utilise clean energy.

Tax Incentives

With more renewable projects becoming viable due to their backing by Contracts for Difference (CfD) schemes, buyers have more options for entering PPAs, helping to diversify the energy market and lower the overall effective cost of energy.

Positive Corporate Image

By committing to renewable energy through a PPA, companies showcase their dedication to climate goals, attracting new customers and improving stakeholder relations.

Securing Clean Energy - How PPAs Drive Renewable Energy Development

PPAs form an established path to financing renewable projects. By locking in energy costs, PPAs help provide the security that makes it possible to take risks elsewhere, whether investing in renewable energy projects or expanding into new markets.

As the need for clean energy and renewables grows, PPAs will become more prevalent as businesses seek to secure their bottom line while supporting sustainable practice.

Price Stability and Risk Management Benefits of Long-Term Power Purchase Agreements

Due to a combination of factors, including political tensions, climate change, and supply chain disruptions, the cost of energy has soared in recent years. This makes long-term price stability more crucial than ever. PPAs, especially Virtual PPAs, help mitigate the risk of price volatility.

By sourcing energy free from physical location constraints and locking in fixed prices for extended periods, PPAs hedge against long-term economic volatility.

Finding the Right PPA: How We Can Help You Secure Clean Energy

 At CFP Energy, we work with renewable energy generators, offtakers and corporate buyers to deliver innovatively structured PPAs and CPPAs. We source, structure and sleeve your PPAs, ensuring that your long-term energy supply is reliable and competitively priced.

Proven Expertise

With 10 years of experience in managing and structuring PPAs across a range of technologies, and a team of in-house energy trading experts, our team can identify renewable and cost-effective energy sources to fulfil your PPA agreement. 

Flexible Contracts

Our team can offer your business a range of short-term, long-term, fixed and/or variable PPA products to suit the individual needs of your project. We can facilitate routes-to-market for flexible, co-located, single-site or portfolio projects.

Cost Certainty 

The past few years have shown just how unpredictable energy costs can be. Our tailored Power Purchase Agreements lock in energy prices for 10-15 years, ensuring that prices remain stable through periods of turbulence, empowering your energy plan. 

Power Purchase Agreements: A Powerful Tool for a Sustainable Future

Already popular with brands like Sainsbury's, M&S, and HSBC, PPAs are empowering businesses to achieve a range of goals central to effective energy planning.

From ensuring cost certainty to long-term renewable energy access, PPAs hedge against market volatility while helping to support ongoing climate commitments. 

With flexible structures, proven benefits, and expert support from CFP Energy, PPAs are a smart and strategic choice for securing a cleaner, more stable energy future.

Ready to discuss your options? Contact our energy team today.