unleashing the power of PPAs – Euractiv

Empowering energy-intensive industries through corporate power purchase agreements (PPAs) can stabilize energy costs, increase competitiveness and finance renewable energy projects. Implementing EU regulatory reforms and removing PPA barriers are key to Europe’s successful transition to a sustainable and resilient energy system.

Emanuele Manigrassi is Director of Climate Change and Energy at European Aluminum.
Annie Scanlan is the Director of Policy and Impact at RE-Source.

Energy purchase agreements: an opportunity for Europe’s energy transformation

Energy-intensive sectors face dual challenges from international competition and volatile energy prices. This is problematic in European primary aluminum production, where electricity costs can be as high as 40% of total production costs. Direct procurement of green electricity can alleviate both of these challenges, as well as help finance new wind and solar power generation capacity if the appropriate regulatory framework is in place.

Corporate power purchase agreements (PPAs) are a key element of the energy transition. These are long-term contracts between corporate energy buyers, such as aluminum producers, and energy suppliers. PPAs can provide stability and predictability in energy costs and electricity supplies, which are crucial for energy-intensive industries operating in a volatile global market.

By breaking down barriers to renewable energy and strengthening the structures that support it, Europe can not only achieve its environmental goals, but also ensure the resilience and competitiveness of its manufacturing industry to provide the raw materials needed to build new wind and solar power generation capacity.

Obstacles for electro-intensive industries using PPAs

In the case of energy-intensive manufacturing industries such as primary aluminum, the main barriers to concluding such long-term contracts are uncertainty about the additional costs of purchasing electricity. These include network costs, surcharges for renewable energy support programs or other non-recoverable taxes. Another example is the indirect costs of the EU emissions trading system included in wholesale electricity prices. This is reflected in the “strike price” agreed when signing renewable energy PPAs. The continued possibility of compensation for indirect costs under the State aid guidelines in the post-2030 ETS is therefore crucial to enable industry to continue signing PPAs.

Shaping costs are also problematic for electrical intensive plants. These are the costs of adapting the electricity generated by a wind or photovoltaic farm to the demand of an industrial plant. Historically, PPAs have been signed by energy-intensive industries in the Nordic countries, where hydropower is cheap and can generate electricity when the wind isn’t blowing and the sun isn’t shining. We are also seeing PPAs signed by energy-intensive companies in Spain, Belgium and Poland, where there is a large supply of renewable energy and high demand. In other countries, PPAs remain a challenge due to the design and consolidation costs that arise from the need to align variable renewable energy generation with baseload energy consumption.

This credit risk is also the reason why more and more companies do not sign PPAs: PPAs are long-term contracts and therefore the energy buyer must be able to pay for the electricity over a period usually lasting 5-15 years. Participation in guarantee schemes aimed at mitigating the risk of non-payment remains low and does not address the key risks faced by energy-intensive consumers when signing PPAs.

Barriers may also include a lack of education among corporate energy buyers about energy purchases and the ability to negotiate complex contracts.

Moreover, the electricity market interventions observed in recent years have created a challenging investment environment for new renewable energy projects through long-term contracts such as PPAs, which can last up to 20 years.

Network bottlenecks and inflexible networks with low levels of energy storage result in high shaping costs. Network saturation and connection delays create uncertainty in the provision of green energy certificates, which prove that renewable power plants are linked to energy consumption.

A major obstacle is the permitting processes for renewable energy projects. It is complex, restrictive, lengthy and involves too many stakeholders, leading to delays in project development and increased costs.

Clearing the Path: How Regulation Can Help

Strengthening regulatory stability and supporting an investment-friendly environment will support the further adoption of corporate renewable energy PPAs and unlock private financing for new wind and solar power plants. The review of the electricity market structure, the Renewable Energy Directive and the Network Action Plan have equipped the EU with the appropriate rules and measures to develop the PPA market. ANDNational implementation of all three EU initiatives is now key to the transition to a fully low-carbon, resilient and flexible electricity grid.

Modernization and expansion of network infrastructure is necessary, butthe costs of network investments should be spread in a way that does not burden energy-intensive industrial customers who are sensitive to electricity prices.

The reformed electricity market structure allows for the combination of PPAs and bilateral contracts for difference (CfD). This avoids the risk of crowding out PPAs. While state-backed bilateral contracts for differences can lead to larger volumes, there is the potential to bring even more renewables online if we combine PPAs and CFDs. Belgium is leading the EU in developing a hybrid PPA and CfD project – other Member States need to follow suit.

As part of the reform of the market structure, financial support schemes, such as guarantee schemes, must also be in place in each EU country. This is intended to alleviate the problem of credit risk. Some pilot programs have been developed with limited success. Learning what works and what doesn’t will be key to helping more companies sign PPAs this way.

As we move towards greater hybridization of renewable energy projects, the combination of solar, wind and storage can optimize the generation profile of PPAs. Designing a regulatory framework for co-located and hybrid renewable energy sources is an important evolution, enabling developers to deliver innovative solutions for specific consumption profiles, such as energy-intensive power plants.

Government organizations play a key role in verifying the source of renewable energy in PPAs, but closer oversight from both national and European regulators is needed to prevent double counting and maintain the credibility of green electricity claims. Simplifying the GO registration process and cross-border harmonization would further streamline the system.

Europe’s journey towards a sustainable future is ambitious, with goals including becoming carbon neutral by 2050 and increasing renewable energy use to 42.5% by 2030. EU Member States must implement new renewables rules at pace energy. It is essential to educate policymakers and industry players about the benefits and mechanisms of PPAs and the barriers faced by industrial consumers. The new political term in Brussels after the elections provides an opportunity for energy producers, industrial consumers, regulators and the financial community to come together to ensure that energy production and consumption in Europe develops without losing its industrial base.