Making Electricity Bills Independent of Short-Term Markets
1.1 Power purchase agreements
Q1. Do you consider the use of PPAs as an efficient way to mitigate the impact of short-term markets on the price of electricity paid by the consumer, including industrial consumers? Yes/No
- Yes
No
Q2. Please describe the barriers that currently prevent the conclusion of PPAs.
In some Member States different barriers remain to the development of PPAs:
- Regulatory Risk: PPAs require a stable regulatory framework to encourage investment and support long-term planning. The current crisis has created a precedent of interventions on inframarginal rents. Since the interventions started, the RES PPAs decreased from 8GW (y 2021) to 6.6GW (y 2022).
- Offtakers’ insufficient creditworthiness: A major barrier across most sectors, particularly in heavy industry and manufacturing, and in less developed EU economies, where many have appropriate energy footprints for PPAs but are not rated by any major credit rating agency.
- The issuance of longer tenors for Long Term Transmission Rights (LTTRs) is missing: Today LTTRs are limited to a year ahead. We recommend allocating LTTR products with longer maturity to at least 3 years and beyond to allow cross-border PPAs.
- Administrative or Regulatory barriers to PPAs: The Electricity Regulation and the Renewable Energy Directive already address some barriers. However, these are not consistently implemented across the EU and some legal barriers persist. For instance, some countries have a limitation on the maximum duration of contracts with consumers, effectively preventing them from concluding a longer-term PPA.
- Technical nature of PPA contracts: Technical features and clauses of PPA contracts requiring bilateral negotiation may slow the entry into the market of less sophisticated offtakers (learning curve effect).
- Difficulty finding offtake volumes beyond large corporates.
- Shaping/balancing costs: They need to be taken into account due to consumption profile and make RES PPAs more expensive, especially in some Member States with a lack of flexible resources and increasing variable RES penetration.
- Lack of supply due to lengthy permitting procedures: For example, 50% of the wind power plants in Norway were developed through PPAs. In 2019 the approval of new projects was paused, resumed only recently, affecting PPA supply.
Q3. Do you consider that the following measures would be effective in strengthening the roll-out of PPAs:
a) Pooling demand in order to give access to smaller final customers
b) Providing insurance against risk(s) either market-driven or through publicly supported guarantee schemes (please identify such risks)
c) Promoting State-supported schemes that can be combined with PPAs
d) Supporting the standardisation of contracts
e) Requiring suppliers to procure a predefined share of the consumers’ energy through PPAs
f) Facilitating cross-border PPAs
Do you have additional comments?
Before going through how these tools may foster PPAs, we would highlight that each option must be carefully balanced in order not to draw liquidity away from short-term markets.
- With multibuyer PPAs via corporate consortia, the consortium could sign PPAs on behalf of several buyers (not able individually to negotiate PPAs), jointly responsible for the contract.
- For example, (a) Developing public guarantees or insurance mechanisms to large users when signing PPAs (see ES, NO), for generators against offtaker default and for banks/lenders securing loan repayment; (b) Extending them to smaller users. To be done minimising competitive distortions. As the market matures further, it should be reviewed & phased out progressively.
- For example, in France, the RES bill now assessed would allow project owners to access a publicly supported derisking scheme for part of their production and producers might sign a PPA for the volumes not subject to public support. This could allow producers to transition towards PPAs. But new support schemes shouldn’t be introduced solely for PPAs, rather tap into compatible schemes. Also, distinct participation criteria in PPAs and state aid must be in place to avoid arbitrage.
- The contract standardisation (building on existing work like EFET PPA contract) would lower transaction costs across parties and enable secondary trading of contracts during their lifetime. The latter would allow for easier resale if parties’ circumstances changed. But it’s crucial to realise PPAs are often used to solve a specific industry problem. Thus, freedom of contracting must be kept.
- The suppliers must have freedom of choice on how to hedge their procurements. Imposing specific instruments would limit the competition in retail markets & increase costs.
- We recommend allocating LTTR products with longer maturity to at least 3 years & beyond to allow cross-border PPAs.
Q4. In addition to the measures proposed in the question above, do you see other ways in which the use of PPA for new private investments can be strengthened via a revision of the current electricity market framework?
- Yes
No