Power Purchase Agreements: securing electricity prices for medium-sized companies

Oldenburg Molten glass is a fascinating substance: liquid like lava, golden yellow like honey, convertible into countless shapes. The Mainz-based special glass manufacturer Schott uses it to make ceramic hobs, parts for telescopes and billions of vaccine vials. The raw materials such as quartz and boron oxide are heated up to 1700 degrees. Most of the energy required comes from natural gas fields all over the world, but Schott is getting a growing proportion of it on our doorstep: from wind and solar parks in Rhineland-Palatinate and North Rhine-Westphalia. To this end, the group has concluded supply contracts with the suppliers Statkraft, Engie and RWE.

Schott, 17,000 employees, 2.8 billion euros in sales, stands for a trend: more and more companies are buying their green electricity directly from the producer. Power Purchase Agreements, or PPAs for short, are often referred to as long-term direct supply contracts.

“PPAs have become more and more popular since they were launched in Germany in 2019,” says Michael Claußner, consultant at the analysis company Energy Brainpool, which maintains a database on the still young market. In the beginning it was tech companies like Microsoft and Google, then chemical giants like BASF and Covestro, who secured electricity from wind turbines or solar parks via PPA, but meanwhile medium-sized companies are also increasingly relying on it, such as the pet shop Futterhaus, the cement manufacturer Opterra, the supplier Freudenberg or the glass manufacturer Verallia. PPAs are offered by around a dozen large and numerous smaller suppliers.

The supply contracts offer advantages for both sides. Customers appreciate them above all because of the electricity costs that can be planned in the long term and as a component of their climate strategy. “We know that PPAs are a good tool with regard to the energy transition,” explains Thomas Hahn, Global Category Manager Energy in Purchasing at Schott.

The glass manufacturer wants to be climate-neutral by 2030 and has been using 100 percent green electricity in all plants worldwide since the end of 2021. 17 percent of electricity consumption in Germany already comes from PPAs, and further contracts are to follow.

In addition to the energy itself, the so-called proof of origin of the electricity is also important for companies. Green electricity producers can have these certificates issued by the Federal Environment Agency. The buyers, in turn, can prove to their customers and investors that they are making a contribution to climate protection.

>> Read here: EU is pushing for more long-term contracts in the electricity market

However, there are only guarantees of origin for electricity that is not subsidized by the Renewable Energy Sources Act (EEG). However, because this applies to most of the green electricity generated in Germany, domestic certificates of origin are scarce. The supply is growing thanks to PPA electricity, for which there is no EEG subsidy.

So far, companies have often obtained this evidence from old hydroelectric power plants in Norway or the Alps. Although these also supply green electricity, they are viewed critically by climate protectors.

“Hydroelectric power plants often sell their GOs independently of the electricity they produce,” says Reena Skribbe, climate policy analyst at the think tank New Climate Institute. “This has the effect that in the end two companies could claim to be green: the buyer of the certificates and the buyer of the electricity. Both refer to the same source.”

On the other hand, anyone who buys electricity via PPA creates an incentive to build new wind and solar parks in Germany. The evidence is therefore considered to be of higher value for climate protectors. In a sense, they are not only clean, but pure.

instrument for financing

The direct supply contracts also have advantages for the green electricity producers: Firstly, they create a financing instrument for old wind and solar parks whose EEG remuneration is scheduled to expire after 20 years. In wind energy alone, this has so far affected systems with an output of nine gigawatts, of which at least two gigawatts are said to have already concluded a PPA. Instead of having to tear down the turbines, which are often in perfect condition, the wind turbine operators can earn even more money this way.

Secondly, direct supply ensures the construction of new plants without EEG subsidies. “Anyone who can prove stable income from the lending banks over a long period of time pays lower interest rates,” says Frank May, head of the wind power company Alterric. The joint venture of the energy supplier EWE and the Aloys-Wobben-Foundation, sole shareholder of the plant manufacturer Enercon, is the largest onshore operator in Germany with wind farms with a total capacity of 2.4 gigawatts. In the past, 30 to 40 percent of the green electricity generated was marketed via PPA or similar contracts.

However, the extreme price fluctuations in the past year led to a market slump. “In this extreme situation, providers and buyers feared that they would contract too low or too high if they committed themselves to the long term,” explains May.

Analyst Claussner, on the other hand, has observed a significant increase in very short-term PPAs for existing plants. Some of these contracts only lasted a few months or quarters.

Since the skimming off of profits as part of the electricity price brake is expected to expire in the summer, he is optimistic about further developments: “If the legislator doesn’t add any hurdles, we will see significantly more PPAs in the future – always provided that the electricity prices allow it.”

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