Innovative financing solutions in PPAs for large-scale PV

Innovative financing solutions in PPAs for large-scale PV
The last year’s turbulence in the electricity markets and the new EU requirements targeted at reducing carbon footprint and greenhouse gas emissions have contributed to the fact that businesses are looking for solutions to ensure a stable energy price and reduction in emissions. PPAs are an instrument that allows them to reach both of these objectives in the effective manner.

The Polish PPA market is still young and developing, hence the most popular PPAs in Poland are still simple long-term structures based on the sale of energy at a fixed price (with or without escalation), often in the simpliest model i.e. Pay-as-Produced. More developed markets, where PPAs are no longer new, are looking for more sophisticated solutions, both in terms of contract structures, pricing structures and the use of storage technologies. Below, we highlight some of the leading trends emerging in developed PPA markets that, according to A-RES experts, may soon be visible in Poland as well.

Growing popularity of green purchasing groups

As more and more off-takers is looking for green electricity, small-to-medium off-takers, that in the past were not able to sign the PPA, are creating collectives called green purchasing groups, that allow them to take part in the PPA market. Entities united in the form of a green purchasing group have greater negotiating power than individual parties, and share the risks/profits of signing a PPA. Pooling of buyers also reduces the costs connected to the preparation of PPAs and diversifies the credit risk for the generator.

Sharing the risk of price volatility

The structure of the PPA based on sharing the risk of price volatility is based on a simple concept of agreeing on a lower, fixed price for electricity and sharing of profits in the event of higher wholesale prices or losses at lower price levels (the so-called ‘profit/loss sharing’ mechanism). The profit/loss sharing allows for partial hedging in the event of both higher and lower wholesale prices. Such a mechanism allows for a dynamic distribution of risks over the life of the contract, which can be beneficial for the survival of the contract, especially at times of significant changes in the market.

Short-to-medium term PPAs as a bankable instrument

Currently, due to the lack of standardization and high costs, PPAs are most often concluded for 10 to 15 years. From the perspective of power generators, even though short term PPAs may be more beneficial from profitability perspective, due to banking limitations they tend to sign longer deals in order to ensure financing is in place. Recent uncertainty about long-term market conditions has led to a greater acceptance of shorter PPA tenors by banks (3-7 years) in the developed markets. The banking sector in these markets is adopting an increasingly long-term approach to the commercial risks associated with renewables (similar to the real estate sector), accepting, for example, the assumption of ‘rolling’ PPAs.

Energy storages as a way to sell energy flexibly

Hybrid PPAs for the supply of energy with a profile modified through the use of energy storage are attracting increasing interest from both consumers and generators. The use of storage allows surplus energy to be stored and use of so-called ‘profile shifting’, i.e. exporting energy to the grid in a more ‘flattened’ hourly profile. Such contracts give the generator greater flexibility in the power supply, reducing risks on both sides of the transaction. Hybrid PPAs allow for an increase in the contracted value of revenues from the sale of electricity and reduce the degree of impact of market price volatility on the project, which, from the banks’ point of view, reduces its risk and at the same time increases its bankability.

The structure mentioned illustrate the dynamic development of PPAs, corresponding to the market’s constant search of new opportunities that meet the expectations of both off-takers and generators. In future, similar solutions may also find application on the Polish market, so it is worth following such trends.

A-RES team