New Model Power Purchase Agreement Shaping the Supply of Renewable Energy
The share of electricity generation based on renewable energy sources is increasing globally every day. As renewable energy capacity grows, negative prices emerge more frequently as supply increases excessively during periods of low demand, especially in markets with limited grid flexibility.
For example, in Spain, the first instances of negative prices were observed in 2024, with around 224 hours recorded at negative prices. In Germany, the negative-priced hours in the first half of 2024 have already surpassed last year's record. In the first 8 months of this year, up to 23% of a typical solar generation installed in Germany fell into negative or zero-priced hours, the majority of which were negative-priced hours, with zero-priced hours accounting for only 2%. In the Nordic countries, the number of negative prices increased from 201 since the beginning of 2023 to 520 in 2024. In this sense, the Nordic market maintains its peak position in Europe as the market with the highest number of negative watches.
These negative prices, which may negatively affect the loan eligibility of renewable energy projects, have led the market, particularly in the United States and Europe, to new Power Purchase Agreement (“PPA”) models. Negative prices will also incentivize Wind Power Plants (“WPP”) and Solar Power Plants (“SPP”) with storage, as they will allow for increased arbitrage-driven returns on battery projects. Although it is not possible at the moment, these new model PPAs may be needed in the coming days with the commissioning of battery pre-licenses in our country. For this reason, some of the new PPA models that are becoming widespread day by day are examined below.
a. Multi-buyer PPA (“mPPA”):
These are agreements where multiple buyers come together to purchase electricity generated from renewable energy in bulk. This method is ideal for large-scale projects that generate large amounts of electricity that cannot be consumed by a single buyer. It is a type of agreement that will also increase demand for renewable energy as players from various sectors are integrated into the system. For project developers, it offers a long-term revenue stream, providing financing and therefore reducing project risk, as well as better prices for sellers and long-term protection for a new group of buyers.
b. 24/7 PPA
These agreements aim to match renewable energy supply and demand more precisely than the PPAs that dominate the market. With 24/7 PPAs, it is necessary to measure electricity consumption and greenhouse gas emissions (“GHG”) in much smaller time units (e.g. hourly) and enable the commissioning of hybrid energy sources such as WPP/SPP with storage. This model meets the growing demand for intermittent renewable power while maximizing revenue and minimizing reliance on fossil fuel-based backup. This model is an attractive option for buyers seeking sharp reductions in Scope 2 carbon emissions.
c. PPAs with Zero Price Integration
These agreements include terms that address scenarios where electricity prices fall below zero, specifying thresholds and deadlines for purchases under these conditions. They also provide stability for investors by reducing the financial risks associated with negative electricity prices. Protective clauses are added to PPAs to hedge against the risk of a negative or zero electricity price. They are available as “Adjusted Settlement” or “No Settlement”. In the “Adjusted Settlement” model, the buyer reduces the PPA payment by that amount when the electricity price is negative. For example, if the PPA price is $50 and the electricity price is -$5, the buyer pays $45. Since the buyer and seller share the risk, a moderate premium is added to the PPA price. In the “No Settlement” model, the buyer does not pay when the electricity price is (-). In this model, a higher premium is added to the PPA price as the seller bears the risk alone. In some applications, the buyer pays compensation for a negative price hour for a pre-contracted period of time (x hours), but not for more than x hours.
d. Hybrid PPA (“hPPA”):
Although this terminology is sometimes used for portfolios where WPP and SPP are gathered under a single roof, what we mean by hPPA here is PPA models where battery storage and renewable resource are handled together. (The term “Combo PPA” is used in the literature for models where WPP and SPP are processed together.) Due to increasing battery storage investments, hPPAs will be a model that we will start to encounter more and more frequently. Revenue modeling is one of the biggest challenges faced by investors in WPP/SPP with storage. This is because breaking down and quantifying revenue streams resulting from the interaction of multiple contracts is a relatively complex task. For this reason, various types of hPPAs (Renewable PPA & Storage Capacity Agreement, Shaped renewable PPAs, Blended renewable and storage premium PPAs), which are briefly mentioned below, where pricing is foreseen according to different scenarios, and special solutions are added to the contract provisions in order to reveal the maximum value.
For further information and support, please contact us at info@lbfpartners.com
LBF Partners Law Firm
For example, in Spain, the first instances of negative prices were observed in 2024, with around 224 hours recorded at negative prices. In Germany, the negative-priced hours in the first half of 2024 have already surpassed last year's record. In the first 8 months of this year, up to 23% of a typical solar generation installed in Germany fell into negative or zero-priced hours, the majority of which were negative-priced hours, with zero-priced hours accounting for only 2%. In the Nordic countries, the number of negative prices increased from 201 since the beginning of 2023 to 520 in 2024. In this sense, the Nordic market maintains its peak position in Europe as the market with the highest number of negative watches.
These negative prices, which may negatively affect the loan eligibility of renewable energy projects, have led the market, particularly in the United States and Europe, to new Power Purchase Agreement (“PPA”) models. Negative prices will also incentivize Wind Power Plants (“WPP”) and Solar Power Plants (“SPP”) with storage, as they will allow for increased arbitrage-driven returns on battery projects. Although it is not possible at the moment, these new model PPAs may be needed in the coming days with the commissioning of battery pre-licenses in our country. For this reason, some of the new PPA models that are becoming widespread day by day are examined below.
a. Multi-buyer PPA (“mPPA”):
These are agreements where multiple buyers come together to purchase electricity generated from renewable energy in bulk. This method is ideal for large-scale projects that generate large amounts of electricity that cannot be consumed by a single buyer. It is a type of agreement that will also increase demand for renewable energy as players from various sectors are integrated into the system. For project developers, it offers a long-term revenue stream, providing financing and therefore reducing project risk, as well as better prices for sellers and long-term protection for a new group of buyers.
b. 24/7 PPA
These agreements aim to match renewable energy supply and demand more precisely than the PPAs that dominate the market. With 24/7 PPAs, it is necessary to measure electricity consumption and greenhouse gas emissions (“GHG”) in much smaller time units (e.g. hourly) and enable the commissioning of hybrid energy sources such as WPP/SPP with storage. This model meets the growing demand for intermittent renewable power while maximizing revenue and minimizing reliance on fossil fuel-based backup. This model is an attractive option for buyers seeking sharp reductions in Scope 2 carbon emissions.
c. PPAs with Zero Price Integration
These agreements include terms that address scenarios where electricity prices fall below zero, specifying thresholds and deadlines for purchases under these conditions. They also provide stability for investors by reducing the financial risks associated with negative electricity prices. Protective clauses are added to PPAs to hedge against the risk of a negative or zero electricity price. They are available as “Adjusted Settlement” or “No Settlement”. In the “Adjusted Settlement” model, the buyer reduces the PPA payment by that amount when the electricity price is negative. For example, if the PPA price is $50 and the electricity price is -$5, the buyer pays $45. Since the buyer and seller share the risk, a moderate premium is added to the PPA price. In the “No Settlement” model, the buyer does not pay when the electricity price is (-). In this model, a higher premium is added to the PPA price as the seller bears the risk alone. In some applications, the buyer pays compensation for a negative price hour for a pre-contracted period of time (x hours), but not for more than x hours.
d. Hybrid PPA (“hPPA”):
Although this terminology is sometimes used for portfolios where WPP and SPP are gathered under a single roof, what we mean by hPPA here is PPA models where battery storage and renewable resource are handled together. (The term “Combo PPA” is used in the literature for models where WPP and SPP are processed together.) Due to increasing battery storage investments, hPPAs will be a model that we will start to encounter more and more frequently. Revenue modeling is one of the biggest challenges faced by investors in WPP/SPP with storage. This is because breaking down and quantifying revenue streams resulting from the interaction of multiple contracts is a relatively complex task. For this reason, various types of hPPAs (Renewable PPA & Storage Capacity Agreement, Shaped renewable PPAs, Blended renewable and storage premium PPAs), which are briefly mentioned below, where pricing is foreseen according to different scenarios, and special solutions are added to the contract provisions in order to reveal the maximum value.
- Renewable PPA & Storage Capacity Agreement model works like two separate contracts as it includes a separate agreement for storage in addition to the PPA to be prepared for WPP /SPP. It is preferred because it makes financing of assets easier.
- In contrast to fixed pricing, the Shaped renewable PPA model utilizes variable pricing by assigning different values to each MWh delivered for different time periods.
- The Blended renewable and storage premium PPA model adopts a Pay-as-Produced (PAP) structure and combines the contractual frameworks of WPP /SPP and storage. Differently, a premium rate is offered for all MWh to be delivered. The buyer is given the freedom to fully tailor the storage facility's charging/discharging schedule to their needs during the term of the PPA, while sellers are protected from price, volume and profile risks, ensuring a harmonized combination of revenue streams.
For further information and support, please contact us at info@lbfpartners.com
LBF Partners Law Firm
s.kayikci@lbfpartners.com