Electricity drives the engine of opportunity in the modern world. It powers innovation in factories and allows smooth education and knowledge transfer. From telecommunications to transportation, power is essential to every aspect of our increasingly dynamic and interconnected world. As a result, investment in power infrastructure must be a part of any strategy for economic development.
RE100 is a global initiative bringing together hundreds of large businesses to achieve the significant goal of using 100% renewable electricity for their operations by the year 2050. Renewable electricity can be acquired from various sources: it can be obtained from the market or generated independently. These sources encompass solar, wind, biomass (including biogas), geothermal, and hydropower. Procuring renewable electricity involves direct purchases from generators and suppliers in the market, such as through Power Purchase Agreements (PPA).
Let us dive into the basic understanding of what a power purchase agreement is through this blog post.
What is a Power Purchase Agreement (PPA)?
A Power Purchase Agreement is a long-term contract between a power producer and a buyer. Under this agreement, a buyer/off-taker (company) agrees to purchase electricity from the renewable energy generator for a predetermined period and at a predetermined price per unit. A typical PPA contract varies between 15 to 20 years. This removes the significant challenges to building new renewable energy source-generating facilities for businesses and helps reduce the carbon footprint.
Generally, a PPA agreement includes various conditions, such as the amount of electricity to be supplied, prices, accounting, penalties, etc. It can be customized based on the specific application.
Advantages of Power Purchase Agreements for Corporates
PPA offers numerous advantages to companies. We have curated a list of these advantages for you, and here it goes:
Efficient Use of Resources
Investing in renewable energy resources promotes energy efficiency. This shift encourages businesses to optimize their energy usage, ultimately reducing the carbon footprint and promoting a more sustainable approach to resource utilization.
Long-term Financial Planning
A power purchase agreement provides stability by fixing electricity costs over a long period, shielding businesses from fluctuations in energy prices. This aids in budgeting and long-term financial planning.
Encouraging Sustainability
By committing to renewable energy through PPAs, businesses contribute to reducing their carbon footprint. This commitment helps them achieve sustainability and environmental goals, aligning with global efforts to withstand climate change.
Corporate Social Responsibility
Committing to renewable energy demonstrates corporate social responsibility, enhancing the business’s public image. It represents to customers, employees, and stakeholders that the company is dedicated to environmental conservation and sustainability, fostering goodwill and loyalty.
Advantages of Power Purchase Agreements for Renewable Energy Producers
For energy producers, PPA provides the following advantages: –
Revenue Stability:
With diminishing government subsidies, having predictable long-term revenue becomes crucial. The power purchase agreement offers a tool for projects to secure steady revenue streams over the long term. This can be through fixed prices, floating prices within a range, or establishing a minimum price.
Timing Flexibility:
Unlike waiting for government tenders or auctions, renewable energy PPAs can be directly negotiated between the generator and buyer at any time. This flexibility allows parties to set terms that suit their schedules without relying on uncertain outcomes from auctions.
Project Viability:
PPAs provide assurance of revenue from a trustworthy partner, enhancing the project’s financial stability. This stability attracts easier financing through debt and equity, making the project more feasible.
Types of Power Purchase Agreements
There are several different types of power purchase agreements based on where the renewable energy project is located and the delivery of electricity. Here are some of the common types discussed: –
On-site versus off-site power purchase agreement
An on-site PPA involves a contract between a power producer and purchaser, where electricity is generated and used at the same location. This type is common for smaller renewable energy projects, like rooftop solar panels or small wind turbines. Here the electricity generated powers the facility where it’s produced. On the other hand, an off-site PPA is a contract between a power producer and purchaser where electricity is generated in one location but consumed elsewhere. This is prevalent in large-scale renewable energy projects such as ground-mounted solar systems and large wind turbines. The electricity generated is transmitted through the grid to the purchaser for consumption at a different site.
Physical PPA V/s Virtual Power Purchase Agreement (VPPA)
In a physical PPA, a power generator sells electricity to a buyer through the grid at a fixed price per MWh for the agreement’s duration. This arrangement involves the physical transmission and purchase of electricity. On the other hand, a Virtual PPA is also known as a financial PPA without physical electricity exchange. The generator and buyer settle on a strike price and separately engage with their utility or market agents to buy/sell electricity on energy exchanges at spot prices. Here, the PPA acts as a financial safeguard rather than involving actual energy transfer.
Green Tariff: An Alternative to Power Purchase Agreement
Green tariffs serve as rate schedules provided by utilities to customers as an alternative to engaging in power purchase agreements with independent power producers. They function as a means to assist in the advancement of renewable energy projects and aid customers in achieving their sustainability objectives. These tariffs offer customers the opportunity to support renewable energy development directly while fulfilling their environmental goals.
Green Tariff 1.0 (GT1):
GT1 is a green tariff enabling customers to buy renewable energy directly from a specific renewable project. Typically, it’s used for on-site renewable energy initiatives, like rooftop solar setups or localized projects.
Green Tariff 2.0 (GT2):
GT2 allows customers to purchase renewable energy that’s generated by a utility or third party and added to the grid. This tariff is often utilized for larger-scale renewable energy ventures such as utility-scale solar or wind farms.
The Bottom Line
The power purchase agreements support cleaner energy and a reduced carbon footprint. They signify a commitment to environmental responsibility, fostering a healthier planet. Additionally, PPAs encourage innovation and forward planning. With agreements spanning over a decade, they provide stability for businesses and energy producers to invest in advanced technologies, paving the way for a renewable energy-driven future.
Power Purchase Agreements (PPAs) drive a significant change in our energy landscape, steering us toward sustainability. They offer stability in the often-volatile energy markets, allowing businesses and utilities to plan for the long term. If you’re considering renewable energy for your business, explore Sunsure Energy’s solar panels for sustainable practices.