Choosing the right Power Purchase Agreement for your organisation

A PPA should be readily understandable and fair to both parties, with clear terms and commercials that reflect current market pricing. The costs involved should be transparent and you should make sure the payment terms meet your requirements.

Are you eligible?

A variety of electricity generation technologies are viable if you want to export your power to the grid. Solar, wind, hydro, biomass and anaerobic digestion are the most common nowadays, and all are eligible for a PPA covering exported power.

The PPA’s structure can depend on whether you’re accredited under the government’s Feed-in Tariff (FiT) or Renewables Obligation (RO) schemes, or free from any such subsidy. This latter case is increasingly true, since the FiT and RO schemes have been closed to new applications for some time.

What are the benefits of a PPA?

• Provides you, as a generator, with income for metered export – The income is often based on a fixed price for the agreed period, but sometimes on a variable rate reflecting near-term market movements.
• Encourages the generation and use of renewable power – Selling renewable electricity to the grid through a PPA helps to displace more carbon-intensive power generation sources (e.g. natural gas) and moves the UK closer to net zero.
• Improves the supply and demand balance – Renewable generation projects can occur in areas of domestic and commercial consumption. When this happens, they can help balance supply and demand in local grid areas, reduce the losses associated with transmission and distribution, and lower costs overall.

Which PPA is right for you?

Different PPA contracts are available depending on your organisation’s priorities and how much energy you have available to sell. There are three main types of PPAs:

1. Fixed price PPAs

This is the most popular form of offtake contract and it’s best for:

• Smaller-scale generators
• ‘Prosumers’ that use the energy they produce and consistently have excess power to sell.
• Those who favour price certainty over reactive pricing

Such contracts lock in the current market rate for energy for an agreed period, usually for one year but sometimes for up to three years depending on market dynamics. It’s particularly appealing at times when market rates are high since generators have an opportunity to lock in favourable prices.

Fixed price PPAs and embedded benefits

These PPAs may differ in how they handle the locational benefits of proximity to consumption – the so-called embedded benefits. With smaller generation projects, the value of these embedded benefits can be bundled with the underlying commodity price. For larger projects with more bespoke requirements, it’s usual to separate the unit rate and pass through an agreed share of the embedded benefits in the monthly statement.

Assuming Ofgem has awarded accreditation for Renewable Energy Guarantees of Origin (REGOs) to your generation project, and regardless of contract type, there’s likely be some value to account for. REGO values are subject to significant change in value, dependent on the relative balance in the market for a given compliance period. This period marks the time over which suppliers present REGOs as part of their Fuel Mix Disclosure to evidence renewable supply.

2. Flexible price PPAs

This kind of PPA gives you scope to exploit the peaks and troughs of the wholesale power market; generally, electricity is more expensive when there’s high demand relative to availability. Therefore, flexible price PPAs are best for:

• Larger generators, especially those able to commit to a predictable output of power (e.g. when using biomass as fuel) rather than those relying on solar or wind*.
• Generators who want to sell all or most of the electricity they produce
• Those interested in trading agreed clip sizes of electricity, in response to market prices achieving pre-agreed trigger levels
• Those who prioritise flexibility over price certainty, on the basis it may deliver a significant improvement in financial performance.

*As an alternative strategy if your site has very intermittent export that’s difficult to forecast or you value complete flexibility, you can leave your exported power to "float" on a pricing index such as N2EX or SSP (System Sell Price).

With a flexible price PPA, you can sell your forecast output incrementally rather than in one go. As your PPA partner, we’ll break down this forecast output into tranches of tradeable power across your contract term. We can fix this at different rates, based on reflective wholesale market prices, during the term, which will usually be for one to three years.

3. Bespoke PPAs

Bespoke PPA contracts can involve fixed or flexible pricing and will vary from company to company, so they’re best for:

• Larger installations, purpose-built for generation
• Generators who want to sell all the energy they produce
• Those with multiple sites, each with different commercial needs
• Variable contract lengths

In more complex cases, a bespoke contract is needed to find the best route to market.

Scale up to a CPPA

Corporate Power Purchase Agreements are allied to PPAs, although they’re not drawn up between a generator and an energy supplier. Instead, a CPPA is an agreement between a named renewable energy generator and, typically, a single corporate buyer.

The corporate buyer agrees to purchase a set proportion of the generator’s renewable power directly from them. The buyer does so as a means of unequivocally stating the source of their electricity, which they can use to fulfil key parts of their Environmental, Social and Governance (ESG) agenda.

By their nature, CPPAs principally concern larger generation assets that might output tens of gigawatt hours across a year. These agreements usually cover an extended term (10-15 years is typical), although the length depends on the circumstances and agendas of both the generator and buyer.

Although the risk profile of a CPPA is different to that of a PPA involving an energy supplier, CPPAs are now a popular choice for generators. This is because renewable developments are less likely to be able to rely upon the assurance of the government-backed subsidies that are closed to new applications. Put another way, a CPPA with a corporation of good standing is often the catalyst for a generator being able to access the finance required to deliver the project.

Want to find out more?

Drax has supported independent renewable power generation in the UK over an extended period, and we currently partner with more than 2,300 generators. If you’re looking for a new power purchase partner, we can help you find a PPA that reflects your commercial need and the specifics of your project.

For more information, download our handy guide below, or get in touch.