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published on 20th August 2021
The energy transition towards renewable energy sources is driven today no longer solely by public aid but also by new contractual instruments which power plant operators are more or less actively looking for in the electricity market in order to achieve the ambitious goals set out in national and European energy plans (PNIEC and PNRR are only two examples).
The so-called Power Purchase Agreements (PPAs) are becoming more and more popular in Italy. It currently seems as if the entire market for renewable energies has been arranged based on PPAs. This can also be seen in the allocation procedures under FER 1 (Ministerial Decree of 4 July 2019) and the fact that they ended with nearly no participating bidders: in the fifth tender initiated by GSE (Gestore dei Servici Energetici) on 27 May 2021, only 297.7 MW out of the total available capacity of 2,461 MW eligible for subsidies were allocated; in particular, the auction for large wind and photovoltaic power plants was again disappointing: out of a quota of 1,581.5 MW of eligible capacity, just 73.7 MW were allocated. The trend reflected in these tariff allocation procedures is clearly negative amid the continuously decreasing number of bidders.
Below is the summary of the results of the fifth tender. In the Group A auction (large wind and photovoltaic power plants), there were eight photovoltaic projects against three wind projects, so there is almost no competition: the maximum discount offered on the base tariff is 2.14 per cent. The size of the projects also falls short of expectations: most are below 5 MW, one exceeds 8 MW and only one wind power plant has a capacity of 31 MW.
PPAs are medium- or long-term agreements that provide for the supply of electricity from renewable sources (predominantly wind and photovoltaic) to a specific party, usually an electricity trader (merchant or utility PPA) or a large company (corporate PPA). The agreements, often concluded before the project development works begin, generally regulate all phases of the project: the planning, obtaining permits, financing, installation and maintenance of a renewable energy power plant. They also include provisions on selling electricity to the buyer at a pre-defined price. In this way, the project becomes financeable and thus viable, as future revenues can be calculated precisely. This also has obvious advantages for the electricity buyer: electricity traders can rely on a secure supply, companies can typically achieve favourable conditions due to the long-term commitment, and additionally save costs simply because they receive the energy directly from the producer. By concluding a PPA on renewable energies, the buyer can also bolster its green credentials and present itself as a sustainable company.
From the perspective of a producer looking to start power production, the conclusion of a PPA is the key to obtaining loan financing that enables the construction of large-scale power plants. Having a third party committing to buy the electricity generated by the power plant for a specified multi-year period allows the producer to develop a proper business plan. A regular flow of cash in the future also creates the possibility of meeting the instalment payment obligations arising from the project financing, thus undoubtedly increasing confidence in the project. However, in times when public subsidies are still available in the Italian energy market, the crucial element is perhaps the higher price – compared to ever decreasing public subsidies – that can be achieved through a PPA. In this respect, higher returns can be generated with a corporate PPA than with a utility PPA, where the party to the PPA is the final consumer intent on reducing energy prices, which are traditionally very high in Italy, while the trader offers prices closer to the national average price PUN (Prezzo Unico Nazionale dell'energia elettrica) or the zonal price PZO (Prezzi Zonali Orari). This also explains why corporate PPAs are currently more widespread in Italy.
Considerable advantages also await the electricity consumer, i.e. the company supplied with the generated energy. For example, the company can use the PPA to calculate its electricity costs in the long term without having to bear the costs of building its own power plant. In addition, the availability of green electricity that PPAs ensure reduces the risk of increases in CO2 prices, especially for industrial companies. If, on the other hand, the buyer is a trader, then he will have an interest in acquiring clean energy to resell it to his customers, who in turn want to contribute to the energy transition and expect a „sustainable product”.
The electricity price agreed in the PPA can be determined using different models, for example: fixed price (a price is fixed for a certain period of time and can be re-defined once that period expires), market price (PUN or PZO, see above) and price with cap and floor, i.e. with a maximum and a minimum value. In any case, the electricity price must cover the costs of building the power plant, financing costs, general operating costs, and the costs of use and balancing of the grid. The producer also reaps additional income from the sale of the Italian guarantees of origin GOs (Garanzia D'Origine). Another issue that the agreement must regulate is the amount of energy available. No difficulties arise if energy is sold to a trader, because he buys all the energy produced. The case of corporate PPAs, on the other hand, is more complex, because renewable energy power plants cannot guarantee the availability of energy around the clock and in most cases there are moments that the company consumes less energy or nothing at all. This means that both the company will need additional supply and the producer will need a buyer to sell surplus energy.
The following aspects also need to be regulated in the agreement: the project development phase (the duration of which has been criticised by the market participants for years in the case of large-scale power plants and which the legislator wants to reduce significantly), the plant construction phase, the plant operation phase (in which the correct measurement of electricity is an issue), the period of electricity offtake, minimum quantities of electricity to be purchased, possible surpluses, pricing and revising prices, grid use and balancing costs (with some components being highly volatile), possible entrustment of grid connection point management, early termination, termination and consequences, insurance/power plant financing clauses, ordinary and extraordinary maintenance and scheduled power plant shutdowns, possible sale of the power plant, and adjustment of the agreement to regulatory changes.
The above issues that are involved in Italian PPA projects are identical to those in the markets of other countries, except for some aspects specific to Italy. Despite the attempts of the legislator to facilitate the conclusion of PPAs through a PPA platform (currently in the start-up phase) of Gestore dei Mercati Energetici, and regardless of the presented advantages, PPAs are spreading slowly in Italy. However, it is evident that the market has matured in recent years, and numerous completed PPAs, mostly corporate PPAs, have been reported only in the last few months. The problems indicated by the parties to those PPAs include: slow approval procedures, public bodies that are against the power plants (as regards this aspect, the legislator enacted Decreto Legge D. L. 31 May 2021, no. 77), low electricity prices, missing long-term hedging instruments in the form of financial instruments of the international power exchanges or insurance options (in Italy the agreements have a term of five to ten years, with hedging reaching five or six years at best), because of which what only remains is the conclusion of virtual PPAs, and the fact that it is nearly impossible for the public administration to purchase electricity on the basis of PPAs.
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Svenja Bartels
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