By Siobhán FitzGerald on 2/06/2025
Topics: Risk management, Energy Transition, PPAs
This interview is the second in a mini-series that covers the history of Power Purchase Agreements (PPAs) (the first interview), the critical approach to their associated risks (this interview), and advanced procurement strategies. This interview touches on the risk management and market reality of PPAs. I asked our experts here at E&C to give us a brief overview of the roles PPAs play in reducing exposure on the energy markets as well as their associated risks.
If you're interested in going into further depth on PPAs, specifically the coming age of the corporate PPA market, you can access the full content, including a glimpse into the future of 24/7 renewable energy, via the complete White Paper here.
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The main misconception is that PPAs are an easy solution – some kind of quick fix for energy buyers to comply with the request of their C-level to move towards 100% renewable energy. They are complex instruments that need careful management and careful consideration from a risk management point of view to ensure that you can blend them into your production mix without completely derailing your costs.
Fortunately, we can see how more and more companies are becoming aware of this complexity rather than going for PPAs as an easy solution, and they're looking for more advanced PPA applications.
Another major misconception we saw when companies first started looking into PPAs was the belief that with a PPA they would no longer be exposed to the market, which is of course not true because such a product is cashed out over the spot market. If you're signing a PPA for a very large part of your volume, you start to exchange very large amounts of energy with the grid – both buying energy from the grid in moments when there's no wind or sun, and injecting a lot of energy to the grid at moments when there's a lot of wind and sun, often at low or negative prices.
For many companies, it's been a hard wake-up call once they had those PPAs signed that they had not actually stabilized or fixed costs at the PPA price level. On the contrary, they were now exposed to increasingly volatile spot markets, which caused a lot of disturbances in their energy costs.
One thing I'd like to bring up when it comes to the evolving energy landscape are of course negative prices and, linked to that, the profile risk – basically the mismatch between PPA production and energy consumption. This is a challenge when it comes to negative prices; you can't use your PPA volumes and then you need to sell back against negative prices.
Linked to that is volume risk – the uncertainty of expected versus actual volumes. With the concept of Dunkelflaute there's the risk that you have your PPA but don't know when production will be there, so you won't get anything and are still exposed. Another risk is the regulatory risk, as these are long-term contracts and the regulatory situation can change. There's also price risk itself. With more renewables coming, you have the cannibalization effect, and linked to that, the risk that you have your PPA against a fixed price, but the question is what the market will do in those hours when you receive your PPA volumes.
The cannibalization effect is linked to the production profile that you see for wind, but even stronger for solar. When you look at the price traded on the exchange – the base price applicable for every hour – and you have a PPA production, let's think about a solar PPA, you get that PPA energy only in the hours when the sun is shining. As a consequence, you have a different price than the base price, called the capture price. It's the volume-weighted average of your solar production based on the hourly spot price.
The cannibalization effect is exactly that, during sunny hours, the price becomes cheaper and cheaper. In the past, you had peak periods where prices might have been higher, but now in those formerly high-priced hours, you see prices going down. As a consequence for you as a company, it means you close a PPA against price X, but exactly in those hours where you use the PPA, there's the risk that the price is even lower than the average for the day.
A well-executed PPA is fantastic for the energy markets and the energy transition because it means you have a seller – the company that builds and runs the wind park or solar park – and a buyer who both find mutual interest. The seller needs the PPA to get income security on their investment, which they need to secure financing from the bank for example.
These days, banks will not finance renewable energy projects without a PPA in place to guarantee income certainty.
On the buyer's side, because it's a fixed-price deal, it means that for the volume you buy under the PPA, in principle you're no longer exposed to the markets. Since up to 80% of our clients have cost stabilization as their main goal for energy risk management, signing such PPAs can really be a good instrument to contribute to that long-term energy pricing stability.
However, all of this depends on executing the PPA well on the buying side, meaning you're not executing it for a volume that creates very large volumes of energy produced but not consumed, or consumed but not produced. For most clients, we see that as long as you stay below 25–30% of your volume – depending on your exact consumption structure – you're in the safe zone. This means most of the energy produced by the renewable asset will be produced in moments when you also have consumption, so you're really buying megawatt hours at that moment against that fixed price.
If you go above that threshold, you start buying megawatt hours that you need to sell back to the grid, often at very low prices, actually undermining your primary goal of cost stability because you're creating exposure to volatile spot markets.
There are options for stretching how much PPA power you can assume while still keeping prices stable. One solution is to look at other pricing constructions – different products, mixtures of different PPAs, different technologies, different geographies – so you have a more balanced portfolio. You can consider baseload PPAs rather than production-based ones, but these come with a price tag. The ultimate solution for cost stabilization is investing in batteries so you can store and discharge excess electricity in those moments when it's producing a lot but you're not consuming it.
If you want to use it as a hedge, my first recommendation is always to stay below that 25% barrier. We can calculate more precisely where the safe point is, but then you can really use it to stabilize costs. Beyond that, you need to consider more advanced PPAs and storage solutions.
PPAs started about 20 years ago, with Google signing the first major PPA around 2015. It was initially big tech companies signing these contracts, but with their rapidly growing energy demand, it was easy for them to absorb this volume. Then, a few years ago, we suddenly saw a big drive from industrial and manufacturing companies to also achieve 100% renewable energy, and PPAs were looked at as that quick fix solution I mentioned earlier. Companies were coming to us simply saying, "find us a PPA at whatever cost" while minimizing the impact on their cost variations.
Today, we see that many of those companies that engaged in PPAs in the early phase are now coming to us, saying they've got these PPAs in place and have completely lost control over costs. They no longer know how much they pay for energy because it's very difficult to calculate, and they see costs fluctuating wildly. This is clearly where we're seeing a big increase in our PPA work.
On one hand, you have companies that were early adopters now living through the negative consequences of signing bad PPAs. On the other hand, we clearly see companies coming to us explicitly asking for a more risk management-oriented approach to PPAs, which is obviously very positive. It's in no one's interest for large companies to end up frustrated with the energy transition because they signed bad PPAs that cost them too much money.
We would definitely advise – and this is something we just mentioned in the previous question – be prepared. Make sure you take a well-informed decision. Take a few extra weeks to educate all stakeholders involved and really ask yourself: are we as a corporate prepared to enter into a PPA? Because one thing is entering the PPA, but what comes after – the risk management – is something important to consider as well.
Are we prepared as a corporate to do this, having a PPA with all its consequences? The risks should be really clear for all decision makers, and it should be aligned with your overall procurement strategy so that the PPA you close is truly aligned with the risk management you do to achieve your overall energy procurement goals.
What Kathleen is saying is so important – that alignment before engaging. We see that many companies first want to see a contract, so they say, "Just go into the market, ask for some quotes, make some analysis, and then we'll start talking about what it really means for the company." That is not a good approach. It gets very messy because you have those proposals already on the table, and salespeople convincing people in your organization that their PPA proposal is the best thing that could ever happen to them. This makes for a very difficult process.
This is why we have educational workshops in our approach, which can be oriented towards different groups within the company – different stakeholders – to ensure everyone understands what we're talking about. This helps a lot to prepare for when you go out to market and start collecting proposals, so everyone already knows what to expect.
We also see within companies a very big difference in knowledge levels. On one hand, you have big companies with experienced energy buyers who know a lot about energy markets and look at this through a specialist lens. Then you have people at the C-level or in sustainability who don't have that deep expertise. We see that in many companies, it's very difficult to get those different stakeholders to talk with each other, speak the same language, and understand all the nuances, which is often an important stumbling block in the process. So, the educational part and preparing before you go out to market is very important to get that alignment.
We can share both good and bad cases. We do see that clients who might have rushed into PPAs, especially around the energy crisis, made decisions that weren't well-informed. This was due to two reasons: first, the prices were very high, so they now suffer partially from the PPA because it was closed at high prices. Second, not all risks were known, and the consequences are now partially surprising for the corporate.
That's what we'd like to avoid – closing something you're not sure about. That's a bad example, but the recent PPA prices that were closed are much lower due to market correction. It's too early to give numbers, but what's always important to keep in mind is that closing a PPA is also a strategic decision – it's the same as a hedge. You do that to protect against upside risk, but it's important to spread your risk. Don't put all your eggs in one basket, and price volatility applies to PPAs as well. Try to spread the decision moment to ensure you don't close everything at one high price.
The good cases are definitely those staying below that crucial threshold. To be honest, most clients today aren't ready with storage solutions to go much above that, and the market isn't really offering great products in terms of baseload PPAs – they're quite expensive. So today, the good examples are those who have signed PPAs where they stay below the threshold, so they're not creating exposure to negative pricing.
For bad examples, I'm thinking of a particular client who negotiated a PPA with another consultant and started to see the risks of signing it. The project developer, which was a big utility company, started saying they could solve those problems, and the client ended up with an arrangement where 50% of the power they buy is in the PPA, and the remaining 50% is being bought for them by the utility. But that's a very bad contract – the client has locked up their entire portfolio with one supplier and is completely at their mercy, leading to sometimes very difficult discussions.
What's important to remember is that these are long-term contracts. Consider such things very carefully and make sure you keep control over your own costs and don't start to depend completely on an external company for what you're paying for energy.
PPAs are great. They're a great contribution to the energy transition we're currently going through. They're an excellent way for you as a company to prove to the world that you're doing your part in that energy transition, but do them well. Like with any great instrument, a great instrument badly applied will only lead to chaos and disappointment. So just do them well, and we can keep working together towards a much better future.
From understanding the critical 25–30% volume threshold to navigating cannibalization effects and avoiding the misconception that PPAs eliminate market exposure, these complex instruments clearly require careful strategic consideration.
Stay tuned for the next interview, where we will delve deeper into advanced PPA structuring, portfolio optimization strategies, and how companies can balance renewable energy goals with cost stability in an increasingly volatile energy landscape.
If you'd like to skip ahead and access the full content, you can download the White Paper that goes into the full detail on PPAs and their place in the Corporate energy market.
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