What’s the Difference Between a Traditional and Renewable PPA?
A Power Purchase Agreement (PPA) is a broad term that covers many types of contracts involving the purchase of energy between two parties.
When we talk about renewable PPA deals, we’re specifically talking about long-term, on- or off-site purchases of energy and renewable energy certificates (RECs) from a renewable energy project which is not yet built.
Conversely, traditional power purchasing for facilities from wholesale or retail providers is much different. These are operations-based, and, depending on the location, may be a utility-provided price fixing mechanism, a wholesale purchase, or something else. These traditional PPAs are much shorter term, and are structured much differently than a long-term renewable PPA.
One of the big differences is that a renewable energy PPA is the contract by which a brand new wind or solar project can achieve financing and get built. Traditional PPAs are from existing resources, so the risks and benefits of each contract are much, much different.
With a renewable PPA, a developer is willing to offer a fixed price for electricity in exchange for the ability to get the project financed with guaranteed revenues from the buyer. This, in conjunction with the environmental attributes bundled with the energy (in the for of RECs), offers corporations a very unique opportunity to buy long-term PPAs, a dynamic which has only existed in the past few years.
When evaluating a long-term renewable PPA strategy, there are also a variety of different risks which must be managed carefully. While such a contract could be hugely beneficial, there are pitfalls which need to be avoided, and where an advisor adds tremendous value. For example, these deals must be accounted for much differently than a typical PPA. They are much longer, and have significantly different credit and treasury requirements. Execution and operational risks are also much different and so a thorough knowledge of renewable energy types, project-specific development and permitting risk, and due diligence on the long-term viability and performance of the project is critical.
A renewable PPA deal can function financially much different than a simple brown power purchase. For example, the value of a PPA is relative to the production-weighted market price of energy at the PPA settlement location, rather than simply being a cost or savings on an electric bill. Performing investment-grade financial analysis on a PPA deal, looking at a multitude of forward-pricing scenarios, and getting the ultimate approval from a C-level executive (like the CFO) is key for the successful execution of a renewable PPA.
Finally, sourcing the best possible deal is also very specific and different than going to power traders for the best bid price. A thorough knowledge of, and great relationships with, the renewable energy developer community is crucial to making sure you get the best deal.
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