Power Purchase Agreements Primer

This blog is part of a series by Guidehouse Insights on power purchase agreements (PPAs); to learn more about the PPA market, check out the new Guidehouse Insights’ PPA Tracker.

Innovative agreements are powering the financial viability of the renewable electric grid as traditional support mechanisms like feed-in tariffs are scaled down and demand for reliable and decarbonized electricity increases alongside pressure to reach net-zero. As of February 2023, Guidehouse Insights had recorded more than 200 GW of announced power purchase agreements (PPAs), representing 1,479 projects that unite buyers and sellers of clean energy. Visibility into future power costs provides offtakers a method to insure against increases in utility tariffs, which is especially valuable for companies with electricity-intensive operations. Set to achieve long-term cost savings through fixed pricing and renewable resource certification, PPAs have emerged as a crucial solution to enable a variety of renewable energy offtakers.

PPAs for Every Market

PPAs are primarily structured according to two agreement types between the renewable energy developer and the offtaker:

• Physical or sleeved PPAs involve a seller and an offtaker connected to the same grid and rely on a licensed utility that takes a sleeving fee for delivering both onsite and offsite renewable energy projects. Direct physical PPAs offer the buyer the opportunity to select the generating source, creating an identifiable contractual link to renewable resources.
• Virtual PPAs transfer energy attribute certificates (EACs) from buyer to seller at the difference between strike price and wholesale market price, rather than trading electricity.

Both options can be valuable tools for corporations, utilities, governments, and others seeking to gain greater control over their energy procurement, meet decarbonization goals, capitalize on ongoing regulatory incentives for renewable energy resources, and achieve long-term cost savings. An aggregated agreement may have a pool of smaller offtakers, an ideal option for companies with limited financial resources seeking to increase their use of renewable energy.

Energy Attribute Certificates

Corporations can participate in PPAs without offtaking power by purchasing EACs. Transferred through online platforms, each EAC represents 1 MWh of renewable energy. The most common types of EACs are known as renewable energy certificates in the US and guarantees of origin in the EU.

Applications

Guidehouse Insights’ PPA Tracker shows that software and services companies represent the second-largest group of offtakers by industry, comprising 11 GW of clean energy capacity. For instance:

• Microsoft signed a physical PPA in 2022 to offtake all of the power produced by ATCO’s Deerfoot solar facility for its Azure Cloud regions in Canada. The project will directly support the technology company’s goal of contracting 100% renewable resources by 2025.
• In 2020, after determining limited physical access to utility-scale renewable power projects, Apple, Akamai Technologies, Etsy, Swiss Re, and others collaborated to procure power from Geronimo Energy’s 194 MW Green River Wind Farm. By leveraging a virtual aggregated PPA, businesses with lower power requirements were able to participate in funding renewable energy projects alongside other high intensity corporate offtakers.

Looking Forward

PPAs remain a leading method for supporting the corporate transition to a cleaner energy future by procuring a long-term dependable power supply. As rules such as FERC 2222 proliferate an increasing number of distributed resources across the grid, clean technologies are coming online to improve power flexibility for a range of customer types. For companies seeking to generate credits and directly support renewable resources by procuring volumes of reliable power, PPAs are providing a method to meet energy, sustainability, and governance enthusiasm. Stay tuned for part two of this series covering PPAs in emerging markets.

Interested in learning more about PPAs signed across the globe? Check out Guidehouse Insights’ latest Renewable Power Purchase Agreement Tracker as well as the other blogs in this series: “Power Purchase Agreements Emerge around the World” and “24/7 Clean PPAs Accelerate Green Hydrogen Production in Europe.”