Renewable energy offtake agreements (Part 1/2)
Powering the future: The role of offtake agreements in renewable energy
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Too long; didn’t read (tl;dr) 😴
Offtake agreements are the behind-the-scenes deals that make your wind turbines spin and solar panels shine
On-site PPAs: The renewable energy source is built on your property and delivers power directly, skipping the grid middleman.
Off-site PPAs: Energy is fed into the grid from a remote location and credited to you via your usual supplier.
Sleeved PPAs: An energy service provider plays matchmaker between you and the generator, handling logistics (for a fee).
Virtual PPAs: No physical energy exchange - just a financial swap based on market prices and a fixed contract rate.
The numbers 🔢
46 GW: Amount of clean energy secured through corporate PPAs in 2023 (a 12% jump from 2022)
~200 GW: Total capacity of PPAs signed since 2008, exceeding the entire power generation of countries like France or South Korea.
15–25 years: Typical duration of physical PPAs.
Ever wondered how those awesome solar panels and wind turbines get the thumbs up to start generating green energy? It’s all thanks to a little something called an offtake agreement. This piece will unpack what an offtake agreement is, and its different forms.
1. Where does this fit?
These agreements are the behind-the-scenes contracts that make renewable power financeable. They provide the steady, predictable cash flow developers need to raise capital, get shovels in the ground, and start replacing fossil fuels at scale.
2. What are offtake agreements?
Imagine you’ve signed up for a monthly subscription box that delivers your favorite snacks. You know exactly how much you'll get, when it will arrive, and how much it’ll cost.
An offtake agreement works in a similar way but for renewable energy. It’s a deal between a renewable energy producer (like a wind farm) and a consumer / 'off-taker' (like a big company or utility). It specifies how much energy will be delivered, at what price, and for how long.
There are a few different types of offtake agreements. In this piece, we will focus on Power Purchase Agreements (PPAs), which are focused exclusively on electricity. While all PPAs are offtake agreements, not all offtake agreements are PPAs.
Part 2 (to be published later) will dive into other types of offtake agreements, such as energy hedge agreements and proxy revenue swaps.
3. How have PPAs grown?
BloombergNEF's latest Corporate Energy Market Outlook report reveals that in 2023, private companies and public institutions signed agreements to secure a record 46 GW of renewable energy for their operations, marking a 12% increase compared to 2022.
Since 2008, companies have signed PPAs totaling ~200 GW of clean energy, greater than the total power generation capacity of countries like France, UK, and South Korea.
4. What are the different types of PPAs?
Offtake Type 1. Physical PPAs
There are three kinds of physical PPAs. They all involve selling and delivering a set amount of electricity, but the main difference is in how that electricity is delivered. Physical PPAs tend to be long-term agreements (i.e., 15-25 years).
Type 1a. On-site PPA (or Behind-the-meter PPA)
An On-site PPA provides electricity directly to the consumer (normally a company) without using the public grid.
The producer builds a generation facility either on the consumer’s property, like within a company's premises, or connected to the consumer by a direct line
The consumer sources electricity directly from this facility
The producer typically transfers RECs to the consumer (this is what we call a 'Black' or 'Bundled' PPA)
It’s like having your subscription box delivered right to your door.
An On-site PPA allows …
Consumers to saves on grid costs and taxes
Consumers to have more control over energy supply
Type 1b. Off-site PPA
In an Off-site PPA, the generated electricity is delivered to the consumer via the public grid.
The producer feeds green electricity into the grid
The consumer sources this electricity from its usual supplier. Any shortfall is supplied by the retailer's generation portfolio.
The producer typically transfers RECs to the consumer
An Off-site PPA allows …
Generation facilities to be placed in locations with optimal conditions (rather than being constrained to a company's premises)
Producers to arrange multiple PPAs with different customers
Type 1c. Off-site, sleeved PPA
A Sleeved PPA is simply an off-site PPA in which an energy service provider acts as an intermediary between the electricity producer and consumer.
The producer feeds green electricity into the grid
The energy service provider assumes the balancing responsibility, combines multiple electricity producers and/or consumers into one portfolio, trades RECs, etc. (and typically charge the consumer a sleeving fee)
A Sleeved PPA allows:
Producers and/or consumers to pass on certain risks (e.g., development risk) to the intermediary
Consumers to have their electricity needs supplemented by the intermediary using other generation sources (if necessary)
Offtake Type 2. Virtual or synthetic PPAs
Synthetic or virtual PPAs decouple the physical flows of electricity from the financial flows. They also tend to be shorter-term compared to physical PPAs (i.e., 7-15 years).
Physical flow of electricity:
The producer and consumer agree on a price per kilowatt-hour of electricity, similar to physical PPAs
The producer's energy service provider (such as an electricity trader) takes the generated electricity and trades it (e.g., on the spot market).
The consumer's energy supplier then purchases the exact amount of electricity the producer has delivered to the service provider, matching the feed-in profile through spot market transactions.
Financial flow ('Contract for Differences'):
When the floating market price exceeds the fixed Virtual PPA price, the producer passes the positive difference to the consumer. When the converse is true - the market price is below the Virtual PPA fixed price - the consumer must pay the producer the difference.
The producer typically retains RECs (although this depends on the agreement)
For example, a company might agree to buy all the electricity from a 100 MW wind project for 10 years at a fixed price of $30 per megawatt-hour. The project sells its power into the spot market, where prices vary by the hour. Meanwhile, the company keeps buying its own energy from the market, but settles the difference financially with the wind farm. If market prices rise above $30, the project pays the buyer the difference. If they fall below $30, the buyer pays the project. This kind of virtual PPA locks in a predictable clean energy price for a decade, which can be valuable since most retail energy contracts only run five years. But it also comes with market risk. In regions with lots of wind or solar power, like Texas or California, high supply can push prices down, leaving the buyer consistently paying more than market rates.
A Virtual PPA allows:
Companies to sign with a renewable asset in a different market/location
Parties to easily setup and scale an offtake agreement
5. What are the overall pros and cons of PPAs?
Pros
For the producer - Just as your subscription box gives the subscription company a regular cash flow every month, PPAs provide renewable energy projects with steady income. This financial stability helps them get built and keep running smoothly.
For the consumer - A PPA reduces the risk of energy price fluctuations, and can also help companies in reaching their renewable energy/sustainability targets
Cons
PPAs are complex contracts that often require a lot of time (and expertise) to agree on the terms
Since PPAs are typically long-term agreements, both parties are committed to the terms and conditions for an extended period
PPAs are like the unsung heroes of the renewable energy world. They stabilize the market, drive investment in green projects, and make clean energy more accessible.
Part 2 (to be published later) will dive into other types of offtake agreements, such as energy hedge agreements and proxy revenue swaps.
