Introduction
"The situation is starting to look like the scenario in 2022, where the EU bought gas at any price."
These words from Arne Lohmann Rasmussen, Chief Analyst at Global Risk Management, highlight the growing concerns over the future of gas prices in Europe. And when gas prices go up, so do electricity prices.
While it’s impossible to predict exactly what will happen, one thing is clear: uncertainty in energy markets is likely to continue. This is where Power Purchase Agreements (PPAs) can offer your business a valuable solution. By locking in fixed electricity prices, PPAs provide stability in an otherwise volatile market. For example, large companies that secured PPAs ahead of the 2022 energy crisis saved millions by locking in stable prices.
First, a quick definition
A Power Purchase Agreement (PPA) is a fixed-price agreement to purchase electricity directly from a solar or wind park. A PPA is signed between a company (the buyer of electricity) and a renewable energy developer (the seller of electricity). An electricity supplier like Reel, facilitates and enables the agreement.
With a PPA, a company purchases a specified amount of electricity from a solar or wind park for an extended period—typically 5 to 10 years—and at a fixed price.
Understanding the PPA Price
A PPA’s price is based on the market’s expectations of future electricity prices. More specifically, PPAs are priced below the expected future price of electricity.
The duration of a PPA also affects its price: a longer duration provides the renewable energy developer with greater revenue certainty for their solar or wind park, allowing them to offer a lower price. This means a 10-year PPA will generally be priced lower than a 5-year PPA.
There is currently no public exchange or market for PPAs, so PPA prices are determined through negotiations between the off-taker (the company) and the developer. As these prices can vary greatly depending on the project, Reel manages all price negotiations on your behalf. Importantly, we don’t take a cut from the PPA price, ensuring our sole focus is on securing the best possible price for you.
What PPA Price Should You Expect?
A good rule of thumb is that the PPA price should be lower than the prices of a regular agreement, a reflection of the long-term commitment of a PPA. PPAs will typically be the lowest fixed-price agreement you can obtain at the time of conclusion.
If the market develops as expected, the PPA will result in a modest saving. If the market increases more than expected, the PPA will give you a large saving. This was the case for companies with PPAs during the 2022 energy crisis. However, as with any other fixed-price agreement, you are not guaranteed a saving, as it depends on whether the electricity market rises or falls.
Hedge Against Rising Electricity Prices
A PPA is a hedge against rising electricity prices. Because PPAs are priced below the expected future price of electricity, they offer limited risk if market prices drop but significant potential savings if prices rise. This structure limits potential losses while providing a substantial upside, making PPAs a financially attractive choice for managing long-term energy costs.
If you’re uncertain about committing to a PPA price but still want some protection against volatile electricity prices, consider starting with a smaller PPA (i.e., purchasing a smaller portion of your consumption through a PPA). This approach allows you to monitor market trends before committing more of your electricity needs to additional PPAs. By doing so, you avoid locking in all your consumption at once and spread your risk exposure more effectively.
Curious if a PPA is the right choice for your company? Reel’s comprehensive PPA guide has everything you need to know. Get your copy here: https://www.reel.energy/ppa-guide
