One of the things that are currently making a lot of noise in the energy sector is Power Purchase Agreements (PPAs). That’s why today we’re going to ask our Director of Business Development, Javier Becerra, a series of questions about PPAs to understand how these contracts work.
In this post, we will break down the most basic concepts, and in future posts, we will explore Bettergy’s strategy for PPA development.
In basic terms, what is a PPA?
PPA stands for Power Purchase Agreement, which is an agreement to purchase energy. The concept is quite broad since any commercial exchange of energy could be considered a PPA.
Specifically, in the context of how it is used in Spain, it is a direct agreement between an energy consumer and a producer to provide energy in a more direct, optimized, and advantageous way for both parties.
Instead of depending on the system, both parties decide which risks, advantages, and obligations they assume.
What gives rise to the need for a PPA?
Historically, it has been possible in Spain since 1997.
The main disruptive factor in the energy sector in recent decades has been the fall in the costs of renewable energy equipment.
This makes it possible to enter into commercial agreements between both sides of the system that offer better conditions than traditional marketing-based operations.
PPAs are based on mature technologies, guaranteeing a more stable medium and long-term price scenario. This facilitates strategic planning and cost visibility.
Specifically in Spain, the electricity system suffers from chronic uncertainty, both in terms of regulations and prices. Numerous political, economic, and social factors have left consumers unprotected. At the same time, Spain has had a deficit in renewable projects over the last decade, despite having the best solar resource in Europe.
What risks do PPA agreements entail?
A PPA involves a long-term commitment, so the market conditions, especially the price of traditional marketing, may at some point become more favorable than the price set in the PPA.
Every consumer should take this risk into account, evaluate it, and mitigate it before signing.
For the agreement to be valuable for both parties, it should include commitments regarding guarantees and penalties to ensure the solidity of the relationship.
