Corporate power purchase agreements explained
Renewable energy corporate power purchase agreements (PPAs) can significantly boost your sustainability credentials and reduce your exposure to volatile electricity prices, but they’re often complex and technical. Here, we demystify some key points.
Corporate power purchase agreements are nothing new. In fact, Australia’s first agreement of this kind was in 2009. But it’s only in the past few years that power purchase agreements have become common for businesses and organisations in NSW.
This surge in the popularity is partly thanks to trailblazing Australian businesses with successful power purchase agreements. These businesses have set a precedent in the marketplace and cleared the way for others to follow.
It’s also because Australia’s electricity retail prices have increased considerably, while the cost of new wind and solar has fallen beyond expectations. A power purchase agreement allows a business to lock in an electricity price for the next 5 or 10 years. This helps reduce uncertainty for businesses and often helps save money in the process.
A power purchase agreement is also an effective way to reduce your emissions and reinforce your company’s commitment to corporate social responsibility.
Wholesale vs retail
You may need to choose between a wholesale or ‘financial’ power purchase agreement or a retail or ‘supply-linked’ power purchase agreement. This is choosing whether to have a retailer help you set up and operate your agreement or to try to reduce costs by going it alone.
Wholesale power purchase agreements
This is a financial contract entirely separate from your electricity bill where you pay a fixed price for electricity to the solar or wind farm. When the price of electricity in the wholesale electricity market is higher, the solar or wind farm pays you the difference and vice-versa if it is lower. Your old electricity bill remains, but it reduces your exposure to price increases and there can be cost savings while still allowing your business to directly support renewable power plants. (Source: Business Renewables Centre Australia)
Retail power purchase agreements
In this case the retailer, not you, is responsible for the contract with the solar or wind farm. In a retail agreement, there is one price for the electricity from the solar and wind farm and another price for the electricity supplied by the retailer when the solar or wind farm is not generating. The aim is to have a match between generation and load so, most of the time, your load is being met by solar or wind and you’re paying that lower price. (Source: Business Renewables Centre Australia)
A wholesale agreement is the equivalent of ‘going it alone’ but a retail agreement involves a third party that understands the electricity market and has systems and guarantees to ensure the agreement operates smoothly.
So, why choose a wholesale power purchase agreement? It’s about cost. Wholesale agreements are generally cheaper than retail ones because no middleman takes a cut.
If you’re a very large business, you’re more likely to have the financial and legal expertise to manage this in-house. Mid-sized buyers (say 5 gigawatt-hours to 50 gigawatts per year) may not be large enough to find a project interested in negotiating directly.
Choosing the right generator for your needs
It’s important to choose a generator that produces electricity when you need it. For example, if your business uses most of its electricity during the day, then solar is probably a good option. If you use most of your electricity at night or at either end of the day, then wind may be more beneficial. Power purchase agreements that use a combination of solar and wind are increasingly popular.
By choosing a generator with an output that matches your load, you can ensure that the electricity you’re paying for is coming directly from the solar or wind farm.
What’s the ideal agreement term?
Unlike conventional retail electricity contracts, which are often renegotiated on two- to three-year terms, power purchase agreements are generally for 10 years or longer. But with the growth of retail agreements, there are now shorter terms available such as 3, 5 and 7 year contracts.
For the generator, a longer power purchase agreement provides certainty of income. This can be useful if the generator needs to show its financial viability to secure financing or other customers, or proceed with development and construction.
For the consumer, a longer power purchase agreement is likely to come at a better price and provides price certainty.
Renewable energy certificates and trading
A large-scale generation certificate is awarded to an energy generator for producing one megawatt per hour of renewable electricity. These certificates can be traded.
Having this certificate enables a business or organisation to make emissions reduction claims against its electricity use – the certificate proves that a certain amount of their energy has come from clean renewable energy.
When negotiating a power purchase agreement, you can elect to include the generator’s large-scale generation certificate in your deal. This means you can certify your business as ‘carbon neutral’ or make green claims such as using ‘100 per cent renewable electricity’.
If you don’t want to make these claims, you can opt not to include a large-scale generation certificate in your agreement. Or you can on-sell your certificate or buy one at a cheaper price than charged by your retailer.
Securing stakeholder approval
Even if the business case for adopting a power purchase agreement is strong, securing the approval of your organisation’s decision-makers can take time, particularly if the agreement is complex.
Rohan Rajput, a project manager at the City of Sydney, recommends educating and engaging your internal stakeholders as soon as possible. “Successful renewable-energy procurement is a journey,” he says. “Keep decision makers engaged and informed throughout that journey as this gives assurance and clarity to all relevant stakeholders about the project’s progress.”
Rajput also suggests not focusing solely on the potential cost savings of a power purchase agreement. “Avoid claims about cost-saving that are difficult to substantiate,” he says. “Frame it as an investment in your company’s reputation, community standing and price certainty. Make the primary business case about sustainability, leadership and community expectations.”
Risks of PPAs
In general, power purchase agreements carry a low level of risk.
However, it’s worth noting these two risks:
- the renewable electricity plant fails to produce and/or send the agreed power
- changes to energy regulation have a negative impact on your agreement
To mitigate these risks, we suggest starting by assessing your expertise. For most of us, the best way forward is partnering with a consultant or retailer who can support you to find the right agreement.
Many electricity market forecast scenarios across the 10 year contract term. Electricity prices are influenced by many factors. A skilled expert will be familiar with the different forecasts.
Many NSW businesses in different sectors have recently adopted power purchase agreements. Read our case studies about the City of Sydney and UNSW.
Another great resource is the Business Renewables Centre Australia, with primers, advanced guides and training courses to help your decision-making process – membership is free. Or contact the centre’s Finnian Murphy at or on 0458 244 618.