PPAs (“Power Purchase Agreements”) as a strategic tool for companies

PPAs (“Power Purchase Agreements”) as a strategic tool for companies

In today’s landscape, where large companies face increasingly complex challenges related to sustainability, energy efficiency, and cost reduction, Power Purchase Agreements (PPAs) emerge as a strategic solution to ensure a stable energy supply at predictable prices. These are long-term agreements between energy consumers and a renewable energy developer (such as wind or solar farms) that guarantee the purchase of electricity at fixed prices for a specified period.

In this regard, companies like Google have committed to achieving carbon neutrality by 2030, and one of the key strategies they have used to pursue this goal is the acquisition of renewable energy precisely through wind and solar PPAs. The tech giant has signed such contracts in Spain for a 10-year period to ensure a clean energy supply for its data centers. These agreements not only allow the company to ensure the sustainability of its operations but also provide predictable electricity pricing.

Requirements for requesting a PPA and types available

To qualify for a Power Purchase Agreement (PPA), it is necessary to comply with the operational procedures established by the System Operator (Red Eléctrica de España, REE) and to provide the necessary financial guarantees to cover the contractual obligations. In this context, legal advice becomes essential, as it ensures the process adheres to all applicable legal regulations.

Moreover, there are different ways to structure a PPA:

1. First, there are physical PPAs, where a formal purchase of energy takes place, although there is no physical delivery as such. They function like a traditional supply contract: the energy is sold by a retailer, but actually delivered by a distributor.
2. Then, there are direct or self-consumption PPAs, where the energy is indeed delivered directly to the consumer.
3. Lastly, financial PPAs involve selling the energy on the market and later settling the difference between the agreed price and the actual market price.

Strategic advantages: more than just an energy contract

This type of contract, in all its variations, offers a number of advantages. First and foremost, they provide long-term financial stability for companies, as they guarantee fixed and predictable prices, eliminating uncertainty and shielding them from the traditionally volatile energy market. This cost certainty allows companies to plan their investments and operations more effectively. Furthermore, opting for renewable energy through a PPA not only contributes to sustainability but also strengthens corporate image, positioning the company as a responsible and committed player in the energy transition.

For consumers, PPAs also offer significant advantages: beyond securing a more competitive and stable energy rate, they provide access to prices that are considerably lower than those of the traditional market.

The fact that PPAs are bilaterally negotiated between the parties involved is also one of their main advantages, as it allows for highly customized contracts with clauses and conditions tailored to the specific needs of each party. For instance, the parties can agree on short- or long-term durations (ranging from 10 to 25 years), depending on their financial goals, consumption forecasts, and energy strategy.

In conclusion, this option stands out as an efficient tool for companies seeking to adapt to today’s demands for sustainability, energy efficiency, and cost control.

A legal framework still in development: regulation of PPAs in Spain

Despite their growing importance in the energy transition and the promotion of renewable energy, Spain currently lacks a specific regulatory framework for Power Purchase Agreements.

Among the main applicable regulations is, first, Directive (EU) 2018/2001 of the European Parliament and Council, dated 11 December 2018, on the promotion of the use of energy from renewable sources.

At the national level, it is also essential to consider Law 24/2013, of 26 December, on the Electricity Sector, which regulates the functioning of the Spanish electricity system and defines the roles and responsibilities of the various market participants, including essential aspects related to electricity generation, commercialization, and consumption.

Additionally, RD 2019/1997, which organizes and regulates the electricity production market, sets out the operational and economic conditions of the wholesale market and mentions the possibility of formalizing bilateral contracts such as PPAs.

Although these regulations provide some legal framework for implementing PPAs in the Spanish electricity market, the lack of a specific regulation dedicated to this type of contract limits their standardization and may complicate their integration into the energy system.