What are Power Purchase Agreements, and how effective are they?

Corporate Power Purchase Agreements or PPAs are a method that businesses are using to meet their sustainability commitments and reduce carbon emissions.

Digital Nation spoke to Aylin Cunsolo, partner in energy and resources at Baker McKenzie, to better understand the different models of PPAs and how effective they are in bringing about sustainable transformation.

According to Cunsolo, the most simple form of a PPA involves direct procurement of renewable electricity.

"In the simplest traditional form, you are buying power directly, physical power directly. So in the renewable context, that could be a solar farm, which is located adjacent to a particular site, or you might have rooftop solar,” says Cunsolo.

“The power purchase agreement is the agreement pursuant to which the customer who's using the power buys that electricity.”

Another kind of PPA works as a financial instrument or a hedge, without actually transferring energy between the buyer and the seller, she says. These agreements are structured as a "contract for difference", being entered into between a buyer and a seller of power.

“Under that agreement, the buyer pays a fixed price for electricity, and they receive what's called the spot price,” says Cunsolo.

“There is no actual physical transfer of electricity under this agreement, but the spot price that they're receiving offsets against the price they're paying their retailer because that’s the price the retailer pays for electricity in the spot market, so it acts as a financial instrument or a hedge.”

According to Cunsolo, businesses that enter into these types of PPAs can genuinely bring about the development of a new renewable energy project.

“By entering into a PPA with a wind or solar farm, that allows that wind or solar farm to get financed, and therefore constructed, because it's providing fixed revenue certainty, over a long period of time,” she says.

Businesses are not only supporting new renewable energy projects through PPAs, but they can reduce their associated emissions by doing so.

Green Certificates, also known as Largescale Generation certificates or LGCs, allow businesses, by acquiring and cancelling them, to meet sustainability objectives including emissions reduction.

“If you would just enter into a PPA, in relation to electricity only, you could still make statements around supporting that project and allowing the project to be constructed,” she says.

“But you wouldn't be able to claim the emission reduction benefits because they could sell the certificates that they generate to someone else. And that other party could make the benefits. So there would be a double recovery of the same emission reduction benefit.”