What are power purchase agreements (PPA)? Who is this type of contract for in the green energy market?

What are PPA?

PPAs (Power Purchase Agreements) are long-term power purchase contracts for a flexible period - usually between six and 10 years. Seems like an extremely distant prospect? Not for those who want to stabilise their finances, their business and build a strong image as a modern company that takes into account sustainability and ESG aspects. The popularity of long-term contracts is growing for good reason. In addition to the virtues of, for example, reducing the carbon footprint, PPAs often make it possible to reduce and stabilise the cost of a company's electricity operations and plan several years ahead. This model of purchasing energy from RES may become standard in the future. It is worth taking it under the microscope.

However, entrepreneurs are still learning the long-term benefits of energy expenditure planning, which, apart from the advantages related to the aforementioned cost reduction, in Poland have a dimension identified with taking care of the company's image. And this should be green today. Importantly, this area concerns not only multinational corporations, but also the SME sector, which, while building its position in supply chains, must now take into account aspects related to green energy and sustainable development solutions. It is these companies that will increasingly want to plan their electricity expenditure in advance, rightly asking about the possibility of PPA discussions:

"In 2024, interest in PPAs will continue to grow due to environmental and cost arguments. The electricity prices negotiated by corporations under such agreements are lower than the prices energy consumers can get on the energy market. The chance to hedge against price fluctuations is also not insignificant," says Grzegorz Tomasik, vice-president of the management board of Reo.pl.

Benefits of PPAs from a company perspective

It is worth looking at PPAs as a stable form of supplying a company with green energy, straight from its source. This guarantee of stability for many companies is not only related to the very important aspect of price, but also to gaining a guarantee of a constant supply of electricity from RES at a specific, contracted level for many years. Businesses increasingly want this long-term security in many aspects, but above all in relation to a fixed price.

Companies that decide on energy from RES and think strategically about it make a real contribution to the dynamics of the energy transition in Poland. Such contracts allow for the financing of further investments and become collateral for banks when deciding to finance the development and implementation of further RES-related activities by a given entity. In our opinion, this is an extremely important element contributing to the development of this market in Poland.

PPAs are first and foremost an effective tool for securing the off-take or sale of green energy in the long term, giving both contracting parties the advantages of the provisions contained therein, but also requiring proper legal construction and planning in advance. This should not be forgotten.

Green energy PPAs - who are they for?

Is this type of document for everyone? No. On the other hand, there are not many restrictions. First of all, when considering PPAs, one must be aware that they do not apply to really small volumes. This is a limitation when planning the purchase of electricity in the long term. However, it is always worth talking to a dedicated energy consultant to identify business opportunities. It may be that the needs meet the opportunities - it is worth refining.

Is there a single standard for concluding PPAs?

A PPA is a document prepared for a specific contract and there can be no single standard. Depending on the needs of the parties entering into it, a number of provisions regulating benefits and obligations are included, which are difficult to list and unify here. The basic ones, present in every contract, are:

• the length of the contract,
• a precisely defined method of settlement,
• price.

Such documents are usually supplemented by so-called NDAs, or non-disclosure agreements.

What should be taken into account before concluding a contract?

Working out the optimum terms for both parties to a contract is no sprint. It is worth taking this aspect into account. The process of agreeing the final shape of a business agreement, which is in fact any PPA, takes up to several months. When planning to implement changes in the purchase of electricity from RES using a PPA, it is therefore necessary to take into account, also the factor of the time required to finalise the talks. Why not contract this type of purchase within 2-3 weeks?

The very analysis of the customer's needs, the technical issues and, finally, the stage of the final choice of partner and the negotiations are processes that require time and detailed preparation. If the company in question is keen to switch completely to green energy and the company's energy profile is diverse, then tailoring the offer to specific needs and expectations must involve diligent work, preparation and a 'tailor-made' final proposal of contract terms. At each stage of the green energy purchase, it is worth taking advantage of the professional analysis and advice we offer at Reo.pl.

"PPAs, due to their long duration, should be treated as documents that are particularly carefully prepared and the terms and conditions contained in them as best as possible," says Grzegorz Tomasik, Vice President of the Management Board of Reo.pl. "The document must clearly specify the terms of purchase for the entire duration of the contract, it is worth making sure that the price of energy is attractive and competitive in comparison to market prices. Equally important are the conditions for its termination, should one of the parties wish to discontinue the document before its end time. The contract should include guarantees on the quality of the energy supplied and address risks, such as changes in legislation, price changes or technical problems related to energy production. As a market, we are still in the early stages of signing such contracts, which is why the education we provide at Reo.pl is so important. Knowledge and competence are in this case the long-term security of the company. It is worth taking advantage of expert assistance at every stage."