Power Purchase Agreements enable business enterprises to contribute positively to the green transition by reducing carbon emissions but the contracts may be quite complex and difficult to finalise.
Power Purchase Agreements (PPAs) are between a seller, for instance a power producing enterprise, on the one side and a buyer of electricity,the offtaker, on the other. The contracts provide an opportunity for business enterprises to purchase renewable energy without involving the power trading exchange and are often called Corporate PPAs.
Under a PPA, the seller and buyer conclude a contract about a certain quantity of power from a renewable energy source to be made available at an agreed price over a period of time. PPAs are available in various forms: on-site PPAs, sleeved PPAs and virtual PPAs. Under an on-site PPA, the power-generating plant supplies power directly to the buyer's consumption point, whereas power under a sleeved PPA is delivered by the seller on the same collective grid as the buyer's offtake. This means that a third party, a power trader, will be making the actual transaction between the parties to a sleeved PPA. Under a virtual PPA, a fixed quantity of power is agreed subject to a price hedge regulating the price risk between the parties when fluctuations occur in the price of electricity on the power trading exchange.
PPAs are complex contracts, and long-term contracts in particular may entail a risk to both contracting parties. A PPA may include constructing a new power-generating plant, called additionality. Under these PPAs, the parties must also take a position on the provisions governing the new-build plant, including delays and point of delivery. In this connection, it is also important to consider regulatory conditions such as power production licences and grid connection.
While contemplating the usual commercial conditions in the agreement, like pricing, duration, etc., the parties to PPAs must also pay attention to some distinctive clauses in a PPA as described below.
For various reasons, the quantity of generated power may be curtailed in relation to the quantity agreed on in the first place. Curtailment may occur owing to unforeseen events, such as overload of the electricity grid or repairs of damage, but also during scheduled maintenance. As curtailment in production may affect the agreed quantity of electricity as well as the number of guarantees of origin generated by a project, the parties must decide on how to approach potential curtailment in a PPA.
The risk of curtailment may, for example, be addressed by adding a guarantee clause that binds the power producer to a defined quantity of electricity to be supplied annually or by making the plant available for production of electricity for a defined percentage of hours annually (availability guarantee). When calculating the quantity, regard may be had to any curtailment, and penalty clauses may be added in the event of failure to supply the agreed quantity. The parties should preferably structure the contract in a way that complies best with the parties' individual requirements and requests. It is noted that, subject to certain conditions and payment, Energinet may reduce or interrupt the transmission grid for some plants if the balance of the collective electricity grid cannot be maintained.
A force majeure clause may be of vital importance for long-term contracts under which the parties cannot foresee their need for termination caused by unforeseen events. While curtailment entails restrictions in the production of electricity as well as in the supply of electricity, force majeure manifests itself in other ways like an inability to supply because of weather conditions, war or expropriation. As is the case with other types of contract, it is important to ensure an adequately wide-ranging clause which must also be stable to cover any situation that may arise without it being characterised as an extended access to terminate contracts for cause.
Renewable energy sources are governed by comprehensive legislation and are subject to political attention in Denmark, Europe and globally. This implies a constantly developing legal framework. It may therefore be necessary to define the parties’ responsibilities with regard to any future legislative amendments that may affect the contents of the PPA irrespective of whether it relates to the allocation of responsibility, payment, grid connection or other matters.
Guarantees of origin
One of the benefits that business enterprises may enjoy by concluding PPAs is the guarantees of origin issued to document and guarantee the origin or the applied method for producing energy.Guarantees of origin are issued by Energinet to the producer, which is why the parties to a PPA should preferably lay down how the guarantees are to be managed, including information on the price of transfer, the party responsible in case of any legislative amendments and the party to which the guarantees will fall.
The balance-responsible party is responsible towards Energinet with regard to imbalances between expected and actual production and consumption of power during a day of operation. Under a PPA, the producer and the offtaker are often individually responsible for managing the balance responsibility for production and consumption. However, the balance responsibility may be managed by a third party, for instance a power trading enterprise. If the parties prefer the third-party alternative, the conditions must be laid down in a third-party agreement concluded with the power trading enterprise, reflecting the clauses stipulated in the PPA. This is particularly important if the parties have different balance-responsible players in production and consumption, respectively.
Bech-Bruun's specialists are experienced in concluding and negotiating PPAs and may be of assistance if you are considering concluding a PPA.