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The war in the Middle East this year has given us a stark reminder of how global events can have a huge impact on domestic energy prices. It follows earlier systemic shocks to global energy supplies, from the oil crises of the 1970s to the energy price spikes in 2021-2023 as the world came out of Covid lockdowns and then grappled with Russia’s invasion of Ukraine.
While each of those dramatic disruptions had a well-documented impact on the consumer market, power-hungry businesses and energy suppliers felt the brunt. That’s why many organisations want to fix their energy costs to avoid price spikes, flatten out the peaks and troughs or volatility and give more certainty over the longer term.
How power purchase agreements work
One way of doing this is with power purchase agreements (PPAs). Being familiar with them can give you a fuller understanding of the clean energy grid – how clean energy markets work and how these agreements help companies reduce their carbon footprint.
Put simply, PPAs lock in a long-term price at which a business or supplier can buy energy. The prices may be somewhat higher than the wholesale price, but if the price climbs they can offer significant savings. In this sense, they are much like fixed mortgages. They work for both businesses and energy providers. Businesses like to be able to forecast their costs accurately and energy generators like to be able to forecast their income.
It isn’t just rising wholesale prices that make PPAs attractive. Renewable energy is another increasingly important driver. Renewables such as offshore windfarms have huge upfront investment costs and the debt incurred raising capital needs to be serviced. Knowing there is a reliable income stream that could last between five and 20 years (the typical duration of PPAs) makes investment decisions of this nature much easier.
Sustainability reporting
But PPAs are about much more than financial risk management. Businesses and energy suppliers who use PPAs are not just buying the energy, they are buying a guarantee of origin. Thus, the environmental attributes of the project in question can enable a business or energy supplier to state that it is powered by low or net zero energy. The companies still normally get their energy from the grid but they will have a certificate saying that the amount of energy they used was generated by renewables.
This can help companies deliver more robust sustainability reporting. Likewise, it can help assure customers who are trying to reduce their own carbon footprints.
There is another benefit when it comes to PPAs and clean energy. Nowadays, energy from renewables is generally cheaper to generate than energy from gas. However, wholesale electricity prices in Britain are determined by the most expensive source of energy generation available. This is known as a marginal pricing system and means the most expensive power source, which is most often gas, determines the price for all electricity. But if a company commits to buying large quantities of renewable energy over a long period a green energy generator may also be able to offer businesses (and energy suppliers) lower prices.
There are other facets to PPAs. Some will cover energy produced “privately”. This might, for instance, be from solar panels on a company’s site or nearby and will bypass the public grid altogether.
A booming market for PPAs
PPAs have become big business in recent years. According to BloombergNEF’s Corporate Energy Market Outlook report, in 2023, private companies and public institutions signed PPA contracts to secure 46 gigawatts (GW) of renewable energy to power their operations – over 12% more than in 2022. The US market, which declined slightly last year, is the biggest, followed by Europe which is growing fast. Since 2008, companies have signed PPAs for almost 200 GW of clean energy. This is more than the generating capacity of countries such as France, the UK and South Korea.
Iberdrola, the world’s second-largest electricity utility company, which owns Scottish Power in the UK, has been using PPAs for more than a decade. It is the biggest player in Europe and in 2024 signed 15 PPAs totalling 1.25 GW, an increase of 38% over 2023. It has signed PPAs in the US, UK, Spain, Mexico and Australia and its corporate clients include Amazon, Apple, Meta and Heineken. Amazon is one of the biggest corporate buyers of clean energy in the world: in 2023, it bought 8.8 GW of PPAs; Meta bought more than 3 GW.
Recently, in the UK, Iberdrola signed a PPA with Amazon associated with the East Anglia THREE offshore windfarm, as well as another with Co-op supermarkets, associated with a photovoltaic solar plant for about 170 MW.
For all of these companies, these deals are tools that help them decarbonise their operations. They also ensure that long-term plans can be made and that price shocks will not happen. Increasingly, they are part of a green future that makes both environmental and business sense.
