PPA: A beginner’s guide to power purchase agreements

More and more Australian businesses are adopting power purchase agreements to fulfil their energy needs. Here’s why.

As a business owner, you may have heard the growing chatter about power purchase agreements. But what exactly are they and why should you consider one?

This is an agreement that a business or organisation will buy electricity from a generator (for example, a solar or wind farm) at an agreed price over a fixed term, usually 10 years.

Entering into a corporate power purchase agreement with a renewable-energy generator can increase price certainty for a business, making it an excellent investment. It also reduces the business’s emissions and improves its environmental reputation.

Here are power purchase agreements explained.

How the electricity market works

Understanding how the Australian electricity marketplace – known as the National Electricity Market functions can help you make sense of power purchase agreements. There are four main players in the market.

Generators. The power plants that generate electricity. Examples are coal-fired power plants and solar farms.

Network companies. The companies that maintain Australia’s poles and wires, collectively known as the grid, and ensure that power gets from point A to point B.

Retailers. The companies that buy electricity from generators and sell it on to consumers (for example, Powershop).

Consumers. The individuals and businesses that buy electricity from retailers.

The grid is the physical infrastructure that moves electricity around the country. Generators, retailers and consumers are all linked through the grid.

Types of power purchase agreements

Power purchase agreements for businesses are called ‘corporate power purchase agreements’ to distinguish them from the standard arrangements that exist between generators and retailers.

There are two main types of corporate power purchase agreements in Australia.

Wholesale. This is a direct agreement between an electricity generator and a business. These are usually the big deals with big business.

Retail. Here, an agreement between an electricity generator and a consumer/business is arranged by a retailer. The generator supplies the electricity to the retailer at an agreed price and the retailer passes it along to the business.

There are also some blended versions of these contract types but for now, let’s keep it simple.

The benefits of power purchase agreements

Entering into a corporate power purchase agreement can benefit your business in many ways:

  1. Lower prices. Your business may be able to negotiate an electricity price below your existing rates in exchange for a longer contract term. At the moment, wind and solar are the cheapest forms of new electricity generation, and a power purchase agreement gives you direct access to these.

  2. Meeting your sustainability targets. If your business has committed to reducing its emissions or become carbon neutral, one of these agreements can help you get there.

  3. Access to preferential treatment. Small businesses can group together and enter into a joint power purchase agreement (known as a ‘buyer group’), allowing them to access pricing and perks that were previously only available to big businesses.

  4. Price certainty. You are locking in an electricity price for the long term, which can make forward planning and budgeting easier. You can also decrease exposure to electricity price changes for the length of your agreement.

  5. Reputational benefits. Sourcing some or all of your electricity from renewable generators communicates your business’s commitment to reducing your impact on the environment. It also helps you attain your corporate responsibility goals.

There are benefits for generators too. Entering into a long-term power purchase agreement can provide a renewable-energy generator with operational certainty. If the generator is new or under construction, these agreements can help it secure the financial backing it needs to start development.

Finding the right power purchase agreements for your business

This is essentially the world of financial contracts, so it can be technical and confusing. Consider partnering with a consultant or retailer who can support you to find the best agreement for your business. A skilled expert will be able to ensure it represents good value by advising you on likely changes to electricity prices over the medium to long term and finding the generators to best match your energy load.

The next steps

A power purchase agreement can be a great way to increase certainty while helping you achieve sustainability goals. If you think this might work for your business, see our intermediate guide to power purchase agreements  or read our case studies about the City of Sydney and UNSW.

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