IFRS Impact on Power Purchase Agreements: Benefits & Challenges for Companies
Learn how Power Purchase Agreements are accounted for under IFRS and their impact on companies....
10 min read
At a time when companies are increasingly seeking sustainable and cost-efficient energy solutions, Power Purchase Agreements (PPAs) offer an attractive way to achieve long-term stability in energy costs while simultaneously reducing your ecological footprint. As organizations face growing pressure from stakeholders and regulators to decarbonize operations, PPAs have emerged as a strategic tool for corporate sustainability. This article sheds light on the different types of PPAs, their benefits, and how they can be flexibly tailored to your company’s specific needs, drawing on best practices and recent industry trends.
Table of Contents
- Introduction
- What are PPAs?
- Definition of PPAs
- How PPAs Work
- Benefits of PPAs for Your Business
- Types of PPAs
- Onsite PPA
- Offsite PPA
- Virtual PPA
- Customizing PPAs to Your Specific Needs
- Delivery Structure as Baseload
- Alternatives to Baseload: Pay-as-Produced Structure
- Regulatory Requirements and Adjustments
- Adjustments to Regulatory Requirements
- Certificates of Origin and Delivery Structures
- Decision-Making for Your Business
- How I Can Help as an Independent Consultant
- Conclusion
- PPA FAQ
Introduction
Discover everything your business needs to know about Power Purchase Agreements (PPAs) in my comprehensive guide, so you can achieve long-term cost savings and switch to sustainable energy sources. We explain the different types of PPAs and how they can be tailored to your company’s specific needs, making your decision-making process easier. As more global companies set ambitious net-zero targets, understanding the nuances of PPAs becomes essential for effective energy strategy and risk management.
What are PPAs?
Definition of PPAs
A Power Purchase Agreement (PPA) is a contract between your company and a renewable energy producer that governs the supply and purchase of energy over a specified period. When you choose a PPA, you commit to buying the generated energy at a fixed price. This long-term contract structure provides certainty for both the buyer and the energy producer, supporting the financing and development of new renewable projects.
How PPAs Work
The way PPAs work is based on the long-term offtake of renewable energy. For energy producers, PPAs provide a way to finance their facilities over the long term. At the same time, your company gains access to clean energy without having to invest in the installation and maintenance of the facilities. According to the International Energy Agency, corporate PPAs have become a key driver for new renewable capacity globally, with over 36 GW of clean energy contracted by corporations in 2022 alone (source).
Benefits of PPAs for Your Business
PPAs offer you the opportunity to achieve long-term cost savings, as energy costs remain stable over the contract period. Additionally, by using PPAs, you support the use of renewable energy sources, highlighting your commitment to sustainability and environmental protection. Many leading companies, such as Google and Microsoft, have leveraged PPAs to not only reduce their carbon footprint but also to hedge against volatile wholesale electricity prices (source). This dual benefit of financial predictability and environmental stewardship is a primary reason for the rapid growth of PPAs in the corporate sector.
Types of PPAs
Onsite PPA
With an onsite PPA, the generated renewable energy is used directly at your company’s premises. This allows you to be supplied directly with clean energy and can significantly reduce your energy costs. Onsite PPAs are particularly attractive for companies with high daytime energy demand and available space for solar or wind installations. For more information on the benefits of renewable energy for businesses, click here.
Offsite PPA
An offsite PPA sources the generated energy from external facilities that are not directly connected to your company. This type of PPA allows you to benefit from renewable energy sources even if you do not have the required locations for energy generation. Offsite PPAs are often used by companies with multiple locations or limited onsite installation capacity. For more details on implementing sustainable practices in business, click here.
Virtual PPA
Virtual PPAs enable your company to feed the generated energy into the grid and receive the corresponding renewable energy certificates. This flexibility opens up new opportunities for you to use clean energy, regardless of your location. Virtual PPAs are especially popular in the United States and Europe, where regulatory frameworks support the use of renewable energy certificates (RECs) to verify clean energy claims (source).
Customizing PPAs to Your Specific Needs
Delivery Structure as Baseload
The PPA template contract currently provides for delivery as a baseload, where the seller nominates a pre-agreed delivery quantity each day. Here, the risk that the actual delivered quantity does not match the contractually owed amount lies with the seller. If the facility produces more or less energy, the seller is obliged to sell excess quantities elsewhere or purchase shortfalls on the market. It is your responsibility to ensure that the agreed delivery quantity covers your company’s electricity needs. Baseload structures are favored by companies seeking predictable energy supply and cost management, especially in industries with steady demand profiles (source).
Alternatives to Baseload: Pay-as-Produced Structure
Due to the volatile generation of renewable energy facilities, a pay-as-produced delivery structure can also be considered. Here, you purchase exactly the amount of electricity that the seller’s facility actually produces. In this case, sellers usually guarantee a certain minimum availability of the facility. Even with this structure, it is your responsibility to ensure that the agreed delivery quantity meets your electricity needs. The baseload structure is particularly suitable for small and medium-sized enterprises, which generally prefer baseload delivery. However, if your company prefers a pay-as-produced structure, the PPA template can be adjusted accordingly, with some contractual provisions changed or added. According to Brookings Institution, pay-as-produced PPAs are increasingly popular among companies seeking to match renewable generation with real-time consumption and maximize environmental impact.
Regulatory Requirements and Adjustments
Adjustments to Regulatory Requirements
Contracts for electricity supply to end consumers are subject to specific regulatory requirements (according to §§ 40 ff. EnWG), which affect contract design. These provisions were originally developed for consumer protection and are often not ideally suited to supply relationships between companies. Nevertheless, they must generally also be applied to PPAs. In practice, PPAs often do not comply with these regulations, and this may lead to action by the Federal Network Agency. To comply with the requirements, there are various ways to adapt the PPA template, for example by including the prescribed minimum content in an annex. This should be agreed in detail between the contracting parties, especially in light of ongoing legislative processes that may restrict the scope of §§ 40 ff. EnWG. For an overview of PPA regulatory considerations in Europe, see ICLG: Energy Laws and Regulations.
Certificates of Origin and Delivery Structures
The practice of baseload delivery can also be combined with certificates of origin, which may come from the same or other facilities. It is possible for the certificates to come exclusively from the facility producing the electricity, or to be supplemented by certificates from other comparable facilities. Here too, deviations and specific adjustments can be agreed in the contract to meet your company’s requirements. For more details, see my article on the accounting of PPAs.
This interesting graphic from a recent Financial Times article shows that more than half of the renewable energy consumption of Amazon (58%) and Microsoft (53%) is covered by so-called “unbundled certificates”—that is, by the separate purchase of renewable energy certificates without the actual electricity used coming directly from renewable sources (source). In contrast, Apple, Meta, and Alphabet source only a small portion or none of their renewable energy from such certificates (Apple 9%, Meta 6%, Alphabet 0%). While this practice is legitimate, it has sparked debate in the industry. Companies like Google (Alphabet) are praised for focusing on 24/7 clean power supply to ensure a more direct and continuous supply of renewable energy, while critics question the actual value of unbundled certificates. The trend toward 24/7 carbon-free energy is gaining momentum, with more companies aiming to match every hour of consumption with clean generation (source).
Decision-Making for Your Business
Assessing Your Energy Needs
You should conduct a thorough assessment of your energy needs to determine how much renewable energy you require and which type of PPA is best suited for you. This step is critical for aligning your procurement strategy with sustainability goals and operational realities.
Analyzing Energy Costs
A comprehensive analysis of your current energy costs can help you identify the potential savings from entering into a PPA and evaluate the long-term financial impact. Many companies use scenario modeling to compare PPA costs against projected market prices, factoring in potential regulatory changes and carbon pricing.
Choosing the Right PPA Model
Based on your energy needs assessment and energy cost analysis, you should select the PPA model that best meets your requirements. Consulting with experienced advisors and benchmarking against industry peers can further support your decision-making process.
How I Can Help as an Independent Consultant
As an independent consultant, I can help you navigate the complexity of PPAs and make an informed decision. My expertise in assessing energy needs and tailoring PPAs to specific business requirements enables me to guide you through the entire process. From the initial consultation to the implementation of the right PPA model, I am at your side to ensure your company acts both financially and ecologically sustainably.
For more information and to learn more about my services, visit my contact page.
Conclusion
Overall, PPAs offer you the opportunity to achieve long-term cost savings while making your contribution to the use of renewable energy sources. To make the most of PPAs, it is important to assess your own energy needs, analyze energy costs, and select the right PPA model. As the market matures and more companies share their experiences, the process of structuring and negotiating PPAs continues to become more streamlined and accessible for businesses of all sizes.
For companies looking to take the lead in renewable energy, PPAs can be an attractive option. With the right decision-making and by choosing the appropriate PPA model, you can achieve long-term cost savings and secure sustainable energy sources.
PPA FAQ
- What is a PPA?
A PPA (Power Purchase Agreement) is a long-term contract between a company and an energy producer that regulates the supply and purchase of energy at a fixed price over a specified period. These contracts allow companies to source clean energy without having to invest in their own generation facilities. For a detailed overview, see the U.S. Department of Energy.
- What types of PPAs are there?
There are mainly three types of PPAs:
- Onsite PPA: Energy is generated and used directly on the company’s premises.
- Offsite PPA: Energy is generated at an external location and delivered to the company via the grid.
- Virtual PPA: The company feeds the generated energy into the grid and receives corresponding renewable energy certificates.
- What are the benefits of a PPA for companies?
PPAs offer companies stable and long-term energy costs, access to renewable energy without their own investment in generation facilities, and help achieve sustainability goals. They also enable better planning security for energy costs. For more on the business case for PPAs, see Utility Dive.
- What risks are associated with PPAs?
Mainly, the seller bears the risk that the actual delivered quantity does not match the contractually agreed amount, which can lead to additional costs. It is also the buyer’s responsibility to ensure that the delivered energy quantity meets actual demand. Market price changes and regulatory risks can also play a role.
- How long do PPAs typically last?
The duration of PPAs can vary greatly, but typically ranges between 10 and 20 years. The exact term depends on the specific agreements between the company and the energy producer.
- What is the difference between a “Baseload” and a “Pay-as-Produced” PPA?
A “Baseload” PPA provides for the delivery of a constant amount of energy nominated by the seller. In contrast, a “Pay-as-Produced” PPA delivers the actual amount of energy generated, which can vary depending on production conditions. The latter model is especially common with volatile renewable energy sources such as wind and solar.
- What regulatory requirements must be observed for PPAs?
In Germany, PPAs must comply with the regulations of §§ 40 ff. EnWG, which were originally developed for consumer protection. These regulations generally also apply to contracts between companies, even though they are not ideally tailored to them. It is important to review regulatory requirements in detail to avoid compliance risks. For more information, see ICLG: Energy Laws and Regulations.
- Can PPAs be customized to a company’s specific needs?
Yes, PPAs can be flexibly tailored to the individual requirements of a company. This includes the amount of energy, contract duration, and delivery structure (e.g., “Baseload” vs. “Pay-as-Produced”). Adjustments can also be made to regulatory frameworks and specific site requirements.
- How can a company select the right PPA?
A company should first thoroughly analyze its energy needs and current energy costs. Based on these insights, the appropriate PPA model can then be selected. It is advisable to seek expert advice to find the optimal solution for the company.
- How can an independent consultant help with PPAs?
An independent consultant can help companies understand the complexity of PPAs, accurately assess energy needs, and select the most suitable PPA. They also assist in customizing the contract to specific company requirements and ensure that all regulatory requirements are met.
