cPPA contracts – an opportunity for cheap energy from renewable energy sources

Energy prices exceeding PLN 2,000 / MWh? Yes, this is a new reality that we are entering when we want to buy electricity for 2023 (there has been a five-fold increase in prices in the last 6 months). A particularly difficult situation is visible in energy-intensive enterprises with a significant share of the cost of energy purchase in the entire cost structure. The cPPA type contracts, which so far have been attractive, pro-ecological solutions for access to green energy, may come to the rescue, and now constitute a significantly cheaper alternative to the purchase of energy generated from conventional sources.

The cPPA (Corporate Power Purchase Agreements) contracts entered the Polish power industry's salons just a few years ago. The first ones willing to take advantage of the contracts were market leaders who created the trend of co-responsibility for the environment, as well as entrepreneurs for whom it was important to guarantee a fixed purchase price for at least a few consecutive years. These contracts are usually concluded for a period of 5-10 years, which results from the requirements set by RES producers (by concluding such contracts, RES producers allow financing of the sources being built, mainly photovoltaic and wind farms).

The market prices of contracts in the last 12 months have varied significantly: from PLN 350 / MWh to even PLN 800 / MWh. The significant price range results mainly from the current wholesale market prices, the current availability of sales offers, but also from non-price terms of contracts, such as the length and beginning of the sales period (currently the prices of contracts starting from 2024 are more attractive than those for which the beginning of the period sales fall in 2023). The final selling price will also be influenced by the way prices are indexed, usually based on the inflation index (sometimes using the so-called inflation or price corridors).

The profitability of purchasing energy in the cPPA formula will depend on many factors, the most important of which are the market prices of energy in the coming years and the amount of additional costs added to the purchase price of energy, with particular emphasis on the balancing cost, which results from the volume differences between energy generation and receipt. Often it is the amount of these costs that will determine the profitability of the entire contract.

Energy sellers usually offer balancing based on the extremely difficult (or even impossible) to forecast SPOT exchange prices (DAM) in the coming years. There are also proposals that take into account a predetermined unit balancing cost, which eliminates the risk of unfavorable price growth in the SPOT price model, but its amount is usually so high that it discourages buyers from using this option. When looking for a cPPA contract, we will certainly meet the English term "pay as produced", which means that the recipient will purchase the entire volume of the energy produced by the producer and it will be his responsibility to balance the volume differences between generation and receipt.

There are various models of cPPA contracts on the market, on which not only the selling price will depend, but most of all the final obligations of the signatories of the contracts (especially related to balancing the energy producer and recipient). The most common are financial contracts (also known as virtual contracts or contracts for difference, so-called CFDs). or contracts with physical delivery.

Financial contracts require the conclusion of contracts between the producer and the recipient, the producer and the seller, and the seller and the recipient. On the other hand, contracts with physical delivery are usually concluded in the form of a tripartite agreement between the energy producer, its recipient and the entity responsible for balancing. Development of a model of cooperation between entities and preparation of appropriate contracts, due to the high level of complexity, is usually carried out by specialized consulting companies, including law firms.

It should be remembered that cPPA contracts, while they can bring long-term benefits to both manufacturers and buyers, are inherently inherent in taking significant financial risks on the part of each stakeholder. When concluding this type of contract, let's take care of the appropriate selection of business partners with whom we will work for many years (the basis is verification of credibility, including the financial condition of our future partners). Let us also pay attention to whether the cPPA agreement will adequately protect the interests of our company in the event of various market scenarios.