What are Power Purchase Agreements?
Power Purchase Agreements (PPAs) are electricity purchase contracts with renewable energy installations and are increasingly used by German medium-sized companies to source cost-effective green electricity. PPAs provide long-term price guarantees, sometimes significant cost advantages, and enable companies to achieve their sustainability goals. Learn more about the benefits of PPAs for medium-sized businesses and how they facilitate a smooth transition to clean energy.

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The Basics of PPAs and Their Importance for Renewable Energies

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Power Purchase Agreements - also known as Corporate PPAs - are contractual forms in the energy market that regulate the purchase and sale of energy between two parties, or electricity supply contracts. These contracts allow an energy buyer to purchase electricity directly from an energy producer, often from renewable sources such as wind and solar energy. PPAs are an essential tool for SMEs to decarbonize their energy supply while ensuring long-term price stability through fixed contract terms.

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In Germany, PPAs are gaining increasing significance, especially since the gradual reduction of feed-in tariffs for renewable energies. German companies are using PPAs to secure green electricity in the long term and improve their CO₂ balance. The legal framework in Germany supports the conclusion of PPAs, but companies must navigate complex regulatory and market-related challenges.

A PPA can be concluded at a bilateral level but requires an electricity supplier in the middle for processing. As a customer, you receive everything from a single source.

What Types of Power Purchase Agreements Are There?

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Fixed Price PPA

A fixed price PPA locks in the price for electricity over the duration of the supply contract, regardless of market fluctuations. This offers companies planning security and protection against volatile energy markets.

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Market Price Linked PPA

In contrast, market price linked PPAs are tied to the current electricity price index. This flexibility can lead to cost savings when market prices fall but also carries the risk of higher costs during price increases.

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Physical PPA

Physical PPAs are contract forms where the produced electricity is physically transported from the producer to the consumer. Typically, an intermediary energy supplier handles the energy logistics from the producer to the buyer. This type of PPA requires that the energy be delivered via the power grid, considering the costs of grid transmission and any losses.

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Physical PPAs are particularly popular in regions where the locations of the buyer and producer are not far apart. An advantage: A specific physical electricity delivery can occur with certain regional characteristics and certificates of origin, which additionally support sustainability goals and may also be legally required.

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Virtual PPA

Virtual PPAs (VPPAs) or financial PPAs enable the buying and selling of energy between producers and consumers without physical delivery. Instead, the producer financially compensates the buyer based on the difference between the agreed sale price in the PPA and the current market price at the time of production.

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This difference is referred to as "Settlement" and can flow from the producer to the buyer or vice versa, depending on market price movements. Virtual PPAs allow companies to benefit from renewable energy advantages without needing to adjust their physical energy infrastructure. The buyer receives the generated certificates of origin but without proof of physical delivery.

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How Can the German Medium-Sized Sector Benefit from PPAs?

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1. Price Guarantees

A main advantage of PPAs is that they provide a long-term price guarantee. Medium-sized companies can protect themselves from rising electricity prices over a longer period because the PPA price is typically fixed for a term of one to 20 years. This allows companies to plan their budgets better and stabilize their cost structure in the long term.

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2. Cost Savings

Moreover, PPAs often provide financial advantages over traditional full supply tariffs. In many cases, the price for electricity from a PPA is below prevailing market prices in the futures markets. This cost advantage can lead to significant savings of around 10% over the contract term. Since renewable producers know the marginal costs of electricity generation (costs for the installation and operation of a solar or wind farm are mostly predictable), bilateral contracts with renewable producers can allow for a discount on expected futures market prices.

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3. Green Electricity Quality and Sustainability Contribution

Another benefit is the promotion of the energy transition. PPAs enable medium-sized companies to switch to renewable energy and reduce their CO₂ footprint. By sourcing electricity from renewable sources, these companies contribute to supporting the expansion of renewable energies and can strengthen their commitment to environmental protection and sustainability. By procuring electricity from renewable sources, PPAs help companies improve their CO₂ balance and achieve their CSR goals (Corporate Social Responsibility). This can also help improve the company's image and attract customers who increasingly value sustainability. In the context of electricity price compensation, PPA contracts can be accounted for under certain conditions.

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4. Energy Independence

Furthermore, PPAs provide medium-sized companies the opportunity to establish direct and long-term partnerships with local electricity producers. These partnerships can be mutually beneficial because they offer a secure offtake guarantee for electricity producers and ensure a reliable power supply for medium-sized companies. This type of collaboration can also strengthen the regional economy by creating investments and jobs in the vicinity of the electricity producer. Moreover, it reduces reliance on a comprehensive electricity supplier that provides 100% of the power.

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Risk Management in PPAs

Risk management is a critical aspect of PPAs. Companies must assess potential risks such as price volatility and the creditworthiness of the energy producer. Through careful analysis and negotiation of contractual terms, these risks can be minimized. 

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PPAs require detailed legal considerations, especially regarding contract durations, termination rights, and guarantees. Therefore, companies should seek qualified legal advice.

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The Role of PPAs in the Energy Transition

The importance of PPAs is expected to grow over the coming years as more and more companies and governments aim to shift their energy supply to renewable sources. 

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Power Purchase Agreements are often seen as a turning point for promoting green electricity. They enable companies to source electricity directly and long-term from renewable sources, which not only increases demand for green electricity but also drives the development of new capacities in the renewable energy sector. PPAs provide a stable financial basis for the operation and expansion of renewable energy projects and reduce reliance on traditional energy sources and government subsidies.

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The ongoing digitization and new regulatory frameworks will further develop and optimize the structures and opportunities of PPAs. Therefore, companies should continuously stay informed about innovations and trends to fully leverage the benefits of PPAs.

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trawa supports medium-sized companies with their industrial electricity procurement by providing Power Purchase Agreements (PPAs) easily in an optimized full supply contract based on an AI analysis of individual electricity needs and preferences.