Power Purchase Agreements for diversifying into power generation
14th October 2021
If you’re a farmer who produces more energy than you use, you’ll have the opportunity to sell your excess power back to the grid as a source of revenue. A Power Purchase Agreement (PPA) could help you achieve best value by agreeing to sell to a third party, often at a fixed price and for a set period.
We spoke to renewable energy firm Drax to learn more about PPA agreements, and the options available to farmers producing energy as a diversification. Any electricity generator exporting to the grid is eligible for a PPA. No matter what type of technology you use to generate power, this can include solar, wind, hydro, biomass, or anaerobic digestion.
You can also be eligible for a PPA if you’re already accredited under the Feed-in Tariff (FiT) or Renewables Obligations Certificate (ROCs) schemes. While the FiT scheme closed to new applicants in 2019, if you’re still on a FiT contract, you can also set up a PPA and run both at the same time.
Different suppliers will offer their own terms and conditions for PPAs. However, there are a few core features that all good PPAs share.
The challenge for farmers looking to enter a PPA is that there’s a lot of choice when it comes to which supplier to partner with. While this gives farm generators a greater choice of potential contracts, not all suppliers charge in the same way. This can lead to discovering hidden costs later down the line.
A good PPA will be easy to understand, reflect up-to-date market prices, and set out clear payment terms. It should be fully transparent with no hidden costs.
What are the benefits of a PPA?
- A source of income – The rates you receive per megawatt-hour and amount of power delivered can be fixed in advance, so you’ll know what price you’ll receive for your excess power.
- No risk – Energy suppliers forecast how much energy they think you’ll produce over a certain timeframe. If less energy is produced than forecasted, as can be the case with weather-reliant renewables, Drax will manage the deficit and make up the difference financially.
- Stay in control – A PPA covers the sale of excess electricity you generate. This means you have complete control of the energy you generate for your own needs. Your organisation will never have to limit its power consumption to meet grid demand for electricity.
- Supporting decarbonisation in the UK – By selling renewable electricity to the grid, your PPA contracts help reduce the use of carbon-intensive power generation, as well as help balance supply and demand in local areas.
Different PPA contracts are available depending on your business, your priorities and how much energy you have available to sell. There are three main types of PPAs and anyone looking to join a PPA contract will need to decide which one is best for them.
Fixed price PPAs
As the name suggests, fixed price PPAs lock in the current market rate for energy for the course of the contract – usually one to three years. This is currently the most popular type of contract. It’s particularly appealing at times when market rates are high, meaning producers can lock in good prices. With this, farmers selling energy will know how much money they’re going to make upfront.
A fixed price PPA is generally best for smaller-scale generators and farmers who primarily use the energy they produce, and only want to sell the excess. It is also the best option for those who prioritise price certainty over flexibility, as once locked into this type of PPA farmers will need to stick with it until the end of the contract.
There are two types of fixed contract. Both give you a fixed price for your electricity but differ in how they handle embedded benefits (the extra payments given as a reward for providing sustainable energy to your local network) The fixed contracts will either be:
- Fully fixed gives you a combined, fixed rate for both your power and associated embedded benefits.
- Fixed price with passthrough embedded benefits gives you a fixed price for your energy and passes through your embedded benefits as a fixed percentage.
Whatever your contract type, you’ll receive a Renewable Energy Guarantee of Origin (REGO) certificate, which proves that the energy was generated from a renewable source and is sold to the supplier along with the energy.
Flexible price PPAs
Flexible pricing allows you to make income based on current market values. The wholesale market varies over time, with energy being more expensive at times of low supply and high demand. A flexible PPA allows you to make the most of this so you can get the best price possible. However, you won’t have the guaranteed income of a fixed PPA. Should the market suddenly crash you could lose out on the income which would have been protected by fixing prices earlier.
A flexible price PPA is generally best for farmers generating larger volumes of power with a predictable output and who are producing with the primary intention of selling energy. It may also be a better option for those interested in energy trading and those who prioritise flexibility over price certainty.
This type of PPA is able to offer more flexibility through staged selling. An energy company will break your output down into blocks over a period of time and they can be fixed at different prices based on market movements. This can be done throughout the course of the contract (usually one to three years).
In more complex cases, a bespoke contract is needed to find the best route to market. Bespoke contracts can involve fixed or flexible pricing and will vary from company to company.
A bespoke contract is best for larger installations, purpose-built for generation, such as large-scale wind and solar farms. Especially if farmers want to sell all of the energy they produce. It also benefits those with multiple sites, or who want to make their own contract lengths.
Want to find out more?
Drax has a long history in supporting independent renewable power generators in the UK. Its power buying scheme currently supports 2,300 renewable generators.