AleaSoft, May 26, 2021. The PPA were erected as pillars of the energy transition. As a market prices risk mitigation tool, the PPA provide benefits to both producers and consumers. The Statute of the electro‑intensive consumers facilitates the signing of PPA with the guarantee of the State. The director of the AEGE, Fernando Soto, will participate in the next AleaSoft’s analysis table to deal with the PPA for the electro‑intensive industry.
Are PPA a fad? Or are they really an instrument that is useful for the electricity sector? Since PPA started making headlines, their “popularity” has been on the rise. From not knowing what was being talked about to placing it as essential for the energy transition in Europe. It was already written on other occasions about all the functions that a long‑term contract such as a PPA can develop. On this occasion, AleaSoft will delve into the advantages that a PPA contract has for both parties: buyer and seller, consumer and generator.
PPA as a risk management tool
AleaSoft always emphasised that the main function of a long‑term electricity purchase contract is setting conditions, including the price, for the delivery of a quantity of energy over a period of time. From this (oversimplified) definition, it is already possible to glimpse the main characteristic of a PPA, setting the conditions at the time of signing for the next ten, fifteen or twenty years.
In this way, the market prices risk is mitigated, or completely eliminated depending on the case. That is, both producer and consumer will not be exposed to the volatility and fluctuations of the market prices.
It might seem that, given that the price conditions established in the contract and the evolution of market prices are different, there will always be one of the parties that will benefit and another that will be harmed. If the market prices rise, it may seem that the producer is being harmed because they could be selling the energy to the market at a higher price. On the contrary, if the market price falls, it may seem that the consumer is losing money because they could buy the energy in the market at a more competitive price.
But the analysis cannot be so simplistic. For example, referring to the electricity producer, without the PPA that ensures a stable income, surely they would not have been able to obtain the financing to build the generation facility, either wind or photovoltaic energy, or they would have obtained the financing, but with much less advantageous conditions, so the return on investment would be lower.
From the consumer’s point of view, even if the market prices are lower at some point, having a long‑term contract that guaranteed a stable cost of the energy supply may be what allowed them to develop their business plan, which surely would not have been viable if they had been exposed to the risk of the fluctuations in market prices.
PPA in Spain
In recent years, a third of the PPA, both in number of contracts and in energy volume, signed in Europe were with renewable energy plants in Spain. This success was given, mainly, by the number of renewable energy projects available in the Iberian Peninsula, as a consequence of the large amount of available renewable photovoltaic, but also wind, energy resource.
The abundant renewable energy resource together with the large number of projects made the prices that producers are offering in Spain very competitive compared to the rest of European countries.
Electro‑intensive consumers’ statute: PPA with State guarantee
The Statute of the electro‑intensive consumers in Spain signed last December 2020 establishes that the facilities that meet the electro‑intensive conditions can have the State’s endorsement through the risk coverage mechanism in the acquisition of electricity. The first consequence of this support from the State is that it will allow the electro‑intensive consumers to obtain more advantageous prices in the long‑term contracts, given that the risk for the producer is very low.
But it is also good news for producers, because signing a PPA with an offtaker that has the endorsement of the State becomes an attractive option to obtain financing and obtain it in more advantageous conditions.
The next webinar organised by AleaSoft will be held on June 10 and it will be attended by Fernando Soto, Director‑General of the Asociación de Empresas con Gran Consumo de Energía (AEGE), who at the webinar’s analysis table will discuss, together with the AleaSoft’s experts, the consequences of the statute and the status of the PPA for the electro‑intensive consumers.
The next AleaSoft’s webinar
During the webinar, entitled “Prospects for energy markets in Europe. PPA and their importance for large consumers. Vision of the future”, in addition to the usual analysis of the evolution of the energy markets, the need for long‑term market prices forecasts for PPA will be discussed. The part of the vision of the future will focus on the decarbonisation of the industrial sector and the role that the green hydrogen will play in the energy transition.