Instrument Overview
A power purchase agreement (PPA) is generally the primary contract between a purchasing entity and a project developer/producer of electricity. These typically are a government agency and a private utility or an independent power producer underpinning a power sector PPP. This contract specifies the volume and price of the energy purchased and the duration of the agreement. A PPA is an example of "third-party" ownership. The government agency becomes the sole client of the private energy company, but there is often a separate investor to act as the system owner or project sponsor [1].
Why it matters for cities
PPAs can be useful to increase the amount of renewable power installed in municipalities’ territory or surrounding areas. Because of their considerable energy needs, cities have the power to increase the amount of renewable energy fed into the grid by giving project developers the necessary revenue stability to invest with confidence [2].
Key features
Ideally, a renewables PPA can be complementary to locally-owned installations (owned directly or via a municipal energy company), but in certain cases it could be the only option for local governments who can’t afford their own renewable energy production facilities or lack the staff capacities & knowledge to establish partnerships with their citizens. A developer can decide to provide the capital for the installation if they have the financial security of a long-term contract for the generation [2].
- Usually long-term contracts (up to 20 years): PPAs are commonly long-term agreement with durations of 10-20 years; however, there is more and more short-term contracts
- Fixed pricing structures/indications: prices are usually fixed and pre-agreed offering long planning horizons (sometimes prices are indexed to inflation depending on the contractual structures)
- Large scale energy projects
- Extensive tendering/upfront process since municipalities need to develop deep knowledge of the energy market, regulatory framework and legal aspects as well as having the administrative capacities and expertise that is required to enter such contracts.
- Complex risk structure - The credit, supply risk, construction risk
- Flexible contract structures (direct, physical or virtual): Project parties can agree for the electricity directly provided to the customer at an agreed price without intermediaries (direct); the electricity can be received via the grid at an agreed price (physical); the producer of electricity gets compensated once the price drops below an agreed price level, or in turn compensates the buyer once the price rise above the agreed price level, yet there is no physical delivery to the grid (virtual) since the producer sells the electricity to the market
How It Works
Steps to PPAs for clean energy in municipalities [2]:
- Decide on which goals PPAs should contribute to
- Sustainability: contribute to municipal climate targets, by reducing greenhouse gas emissions, water and air pollution associated with electricity consumption. Can include improving energy performance certificate (EPC) score of municipal buildings, in which case RES production needs to be local, and definition of local needs to checked.
- Financial: help keep the town’s budget under control, through energy cost savings and predictable price evolution over a longer period.
- Social: broader local benefits for citizens, workers and businesses. Foster participation in RES projects, alleviate energy poverty, create employment or innovation opportunities.
- Assess the municipalities’ energy picture
- Electricity consumption and profile: how much in total, and when, as detailed as you can: which months, time of day. Seek assistance from local energy experts, the current energy supplier and grid company if needed.
- Scope potential projects in development in the area that could be interested in making an offer. Investigate potential for new solar and wind projects in the municipality on public and private roofs and land.
- Scope public participation potential in the area: cooperative developers, energy communities, active groups of citizens, interested social housing or school communities. Scope neighbouring municipalities going through a similar exercise that could be interested in joining forces.
- Rules and contracts
- Investigate appropriate general PPA structure (direct line, physical, virtual). Compare third party-owned renewables (often solar) and lease agreements for wind or solar on municipal properties. Engage specialised legal advice. Template contracts can be helpful.
- Investigate applicable public procurement rules to prepare tender for projects, involving energy communities if desired. Pool demand with other municipalities if possible for benefits of scale.
- Be careful when setting the tender criteria, don’t make them too complicated but consider the objectives you want to achieve and the companies (or communities) already active in your area.
- No need to go big if it’s the first time. For example, by keeping the volume of electricity you will purchase via the PPA rather low, you can simplify the management of the contract and reduce risks.
Benefits & Challenges for Cities [1]
Benefits
- PPAs lock in long-term pricing for electricity, helping to manage the risk of volatile power markets.
- PPAs reduce investment costs associated with planning or operating renewable energy plants.
Challenges
- There is a wide range of challenges in implementing and connecting independent power plants, such as supply risks associated with the availability of solar and wind, including connecting fluctuating energy sources to the grid and deciding who should bear the costs of any curtailment (the act of reducing or restricting energy delivery from a generator to the electrical grid).
Use Cases
Ghent’s Virtual PPA with Beauvent Energy Cooperative [2]
To meet its goal of sourcing at least 30% of public building electricity from local renewables, the city of Ghent pursued a virtual Power Purchase Agreement (PPA), as rooftop space was insufficient to install the necessary capacity. With support from Vlaams Energiebedrijf (VEB), Ghent set minimum requirements for the bid: they wanted a virtual PPA for RE, to deliver a minimum volume of 500 MWh/year, to start at the latest 10 months after the closing of the contract and for a period between 1 and 15 years with at least half of the production facility to be owned by a citizen energy community.
Flemish cooperative Beauvent won the bid, partnering with timber company Lemahieu to use its warehouse roofs for a 7.9 MW solar installation - 20% of Ghent’s public electricity use.
The contract was signed in December 2021, supported by VEB and legal advisors. Completed in January 2023, the project - Ghent’s third-largest renewable installation – enabled 2.5 million euros in investment from the cooperative (incl. 700,000 euros in citizen investment, who became members of Beauvent) thanks to the long-term financial earnings ensured by the PPA. This provided the city with local green energy access, local ownership, and progress toward climate goals
Ghent’s success factors :
- A team dedicated to public building decarbonisation
- Strong support at political level
- Access to legal and financial expertise at an affordable price
When to Use It
Appropriate energy market regulation must be in place, including feed-in-tariffs (a policy mechanism that guarantees renewable energy producers a fixed price for the electricity they feed into the grid over a set period) and regulation allowing municipalities entering into long-term agreements [1].
References
[2] PPAs-Briefing_Energy-Cities_RAP.pdf