The energy sector is witnessing a surge in the adoption of Power Purchase Agreements (PPAs) by energy buyers, particularly across Europe and the US. Benefits of a PPA are manifold: these contracts provide cost stability, energy supply security as the buyers secure a consistent and reliable source of energy for the contract duration, and the guaranteed supply of clean energy credits. These credits, known as Energy Attribute Certificates (EACs), are a way for energy buyers to account for and prove that  their supply of renewable energy is matched with renewable power sources. 

Given the long-term duration of PPA contracts (typically 10-20 years), it is paramount for energy buyers to consider the evolving regulatory landscape when entering into these agreements. Regulation related to clean energy purchases is becoming increasingly stringent and undergoing continuous updates such as the addition of new RE100 requirements and GHG Protocol review. Ensuring this is accounted for in your PPA contracts is necessary to safeguard against potential financial penalties arising from non-compliance with evolving regulatory standards for renewable energy reporting.

This blog will guide you through how PPAs work and explore ways in which changing energy regulations can affect PPA reporting.

How Does a Power Purchase Agreement Work?

Power Purchase Agreements (PPAs) refer to long-term, renewable energy contracts between a power producer, typically a renewable energy generator, and a power purchaser, which can be a utility company or a larger corporation. 

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PPA contracts offer organizations fixed prices for a stable and reliable supply of electricity. This, in turn, helps businesses accurately budget and forecast energy related expenses. Directly contracting electricity from a renewable asset can improve an organization’s sustainability credentials whilst also providing a hedge against fluctuating energy prices. 

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When it comes to PPAs, companies have two main options: a virtual PPA or physical PPA. 

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Physical PPAs function by  purchasing electricity directly from a local renewable energy source, such as a solar farm. The electricity is delivered through a dedicated power grid infrastructure. Companies benefit from a fixed price for electricity, ensuring price stability but physical PPAs require the project and the company to be directed connected to the offtakers facility. The appeal of a physical PPA lies in its flexibility, as the company has the choice to consume the purchased electricity directly or sell it back to the market.

Virtual PPAs operate differently, functioning as financial instruments. Also known as financial PPAs, these agreements focus on the financial aspects without the physical electricity delivery. Virtual PPAs allow companies to claim the sustainability impact of clean energy even if it doesn't power your facilities directly. This is because the energy buyer receives the energy attribute certificates directly related to the asset within the PPA contract. The benefit of these contracts is that by contactually committing to a PPA, you are participating in the creation of additional renewable energy generation. This is because many power producers rely on the financial security they get from PPAs to continue developing new renewable assets.

In short, a PPA is a contractual agreement between an electricity generator and a buyer outlining the terms for the sale and purchase of electricity over a specified period.  It can either be physical or virtual.

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 Below is a breakdown of the process:

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Key PPA components like the volume of electricity, contract duration, and pricing structures are established through negotiations between an energy buyer and a generator.

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Once the PPA terms are finalized, the generator commits to delivering the agreed-upon electricity volume to the buyer throughout the contract period.

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Electricity is delivered to the buyer via the grid, with payments based on the agreed-upon pricing structure and consumption. A fixed price for power is often agreed upon for the duration of the contract, often via a contract for difference, which provides price stability for both the power producer and energy buyer.

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Regular monitoring is essential to ensure compliance with PPA terms, including tracking energy production, delivery, and payments.

How Changing Energy Regulations Impact PPA Reporting

Entering into a long-term Power Purchase Agreement (PPA) requires careful consideration. Increasingly stringent voluntary reporting standards can create challenges down the line if your PPA contracts do not remain of value throughout their whole lifecycle.

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For example, the RE100 initiative has tightened its criteria for claiming renewable electricity including stricter market boundaries and commissioning date limits which will come into play from next year: 

1. Revised European Market Boundaries

Only countries within the EU single market, members of the Association of Issuing Bodies (AIB) issuing European Energy Certificate System (EECS) Guarantees of Origin, or connected to such countries, are now considered eligible for inclusion in the EU single market for renewable energy. This change excludes previously included countries like Cyprus and Serbia.

2. 15-Year Commissioning Limit

Renewable electricity procurement must be from projects commissioned or re-powered within the past 15 years. PPA contracts can only be exempt from this if the buyer has entered into them as the original offtaker from the project and extensions of those contracts, even if they exceed fifteen years in length, including:

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• Physical power purchase agreements with off-site grid-connected projects
• Financial power purchase agreements
• Project-specific contracts with electricity suppliers
• Project-specific contracts for unbundled EACs

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Further complicating the picture is the Greenhouse Gas (GHG) Protocol, the foundation for voluntary and mandatory climate reporting standards like Corporate Social Responsibility Directive (CSRD). While the specific details are still being finalized, it is expected that the guidance around what buyers can account for as renewable energy will be subject to more requirements once the revision has been finalized. For energy buyers, this will affect how they purchase electricity and which of their purchases will be legitimately counted as renewable. PPA contracts that may previously have been inline with regulation may have an uncertain future for the contracting energy buyer. 

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To give an example of how these regulations could affect your PPA contracts, let’s say a Spain-based company entered into a virtual PPA with a renewable asset based in Serbia and there’s a decade left on the agreement. Starting next year, they would no longer be able to claim this energy as renewable under the new RE100 technical criteria due to the revised definition of an EU single market. To combat this, ensure your PPA contract has sufficient clauses to adapt to changing regulations. This way, you can safeguard the value of your PPAs, you can speak to one of our experts to understand more about how to safeguard your PPA contracts, and how our tools can help you with the monitoring of your contracts. 

How Flexidao Can Help

Flexidao stays ahead of the curve on evolving reporting standards, ensuring our advanced data, software and advisory solution remains aligned with the latest regulations. Our platform offers comprehensive visibility into your PPA portfolio, including critical data points such as asset commissioning dates. This empowers your organization to make informed decisions, optimizes your PPA reporting process, and helps avoid compliance pitfalls.

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