UK power purchase agreements: Direct, sleeved & synthetic models explained

In the dynamic realm of energy procurement, Power Purchase Agreements (PPAs) stand as a useful instrument that not only facilitates the transition for corporate entities towards renewable energy but also redefines the interactions between generators and consumers of power.

A PPA is a contractual arrangement between a power producer (the Generator) and a manufacturer customer (the Consumer), where the Generator installs a solar PV system on the Consumer’s site (this is a Physical PPA) at minimal upfront cost. The Consumer benefits from reduced electricity rates, while the Generator earns revenue from the electricity sold. The PPA arrangement not only facilitates sustainable energy solutions but also provides economic advantages to both parties.

The landscape of PPAs in the UK is characterised by a variety of models, each tailored to meet diverse needs and circumstances of the Generator and Consumer. From physical or direct PPAs, where power is physically delivered from the Generator to the Consumer, to sleeved PPAs that involve an intermediary such as a utility (the Utility) to ‘sleeve’ the power through to the Consumer, and synthetic or virtual PPAs, where the physical delivery of electricity is not required, the variations are as complex as they are varied. In manufacturing, terms such as ‘On-Site’ and ‘Off-Site’ are common.

On-Site PPAs refer to cases whereby the Generator installs and operates a power generation system (such as solar panels or wind turbines) on the manufacturer’s premises, supplying electricity directly to the facility. Off-Site would be where a manufacturer procures energy from a renewable project located elsewhere and receives power from the Utility.

The PPA outlines key details such as the price of electricity and the quantity to be supplied, tailored to meet the specific needs of both parties involved. These agreements typically span long-term periods of 10 to 25 years, with the Generator being responsible for system maintenance and operations throughout the PPA term. This long-term commitment ensures continuous operation and maintenance of the energy systems, securing a stable energy supply and predictable costs.

At the end of a PPA term, the Consumer will usually have options to either extend the agreement, purchase the installed energy system, or have it removed. PPAs define all commercial terms including the project's commencement, electricity delivery schedule, penalties for non-delivery and payment conditions. Whilst this discussion focuses on electricity, similar structures exist for “green” gas, known as Gas Purchase Agreements (GPAs), highlighting the versatility and adaptability of such agreements in promoting renewable energy consumption.

In terms of the risk allocation, a Direct PPA would consider risk specifically between the Consumer and the Generator, meaning this is simply negotiated between the two parties in the contract. Generally speaking, a Direct PPA would set out that the vast majority of operational, maintenance, design, construction, procuring of relevant planning consents, supply/volume of energy and regulatory compliance, risks and liabilities lie with the Generator themselves as there is no Utility involved.

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In addition, with respect to regulatory compliance, the Direct PPA would address compliance with relevant regulations, including those related to renewable energy certificates (i.e. the RECs) and grid connection (this might involve the Generator procuring a grid connection agreement with the relevant body or entity).

However, it is still likely that the Generator will want certain indemnities from the Consumer for use of the Generator’s intellectual property rights (if any are licensed across to the benefit of the Consumer), their data, and so on. 

To the three-party arrangement, the Sleeving PPA needs to be very detailed on the allocation of risks and reflect that the market complexities such as grid balancing and regulatory compliance are at the Utility’s risk. There needs to be clear contractual provisions dealing with risk allocation, including regulatory risks, credit risks, and operational risks, and detail the mechanisms for risk mitigation and dispute resolution.

For instance, the Consumer will want from the Utility robust and auditable provisions dealing with the securing and retaining of Renewable Energy Guarantees of Origin (REGO) and Renewables Obligation Certificates (ROCs) from the relevant generating station to demonstrate that the energy supplied is renewable (and if relevant to the Consumer, demonstrate traceability), and this obligation will need to be expressly reflected in the contract provisions.

In addition, the best and usual position for the Consumer in a Sleeved PPA arrangement is to see that the Utility is responsible for bearing any risk in fluctuations in the wholesale market price for the power, which significantly reduces the risks around pricing for the Consumer. Again, this requirement needs to be expressly drafted into the Sleeved PPA.

Finally, there may potentially be situations where a dispute between the Generator and the Utility results in some sort of impact on the Consumer and, as such the risk involved for the Consumer needs to be dealt with accordingly in the Sleeved PPA and any back-to-back arrangement with the Utility.

What are REGO and ROCs?

Since Brexit, the REGO Scheme has been adopted as the “equivalent scheme” to the Renewable Energy Directive 2018 ((EU) 2018/2001). This Directive obligates EU Members States to provide a Guarantees of Origin to essentially certify the legitimacy of the production of electricity, heating and cooling being from an eligible renewable energy.

ROCs[1] are electronic certificates issued by Office of Gas and Electricity Markets (Ofgem) to accredited power stations that generate electricity from eligible renewable sources. ROCs can be used by licensed electricity suppliers (i.e. such as the Utility) as evidence of their compliance with the Ofgem Renewables Obligations and are tradable and, therefore, to ensure the efficacy and legitimacy of the Sleeved PPA arrangement, securing of these ROCs is important.

In conclusion, PPAs represent a sophisticated and strategic approach to energy procurement, crucial for advancing renewable energy initiatives and achieving sustainability goals and effective company stewardship. As the landscape of PPAs continues to evolve, understanding the contractual intricacies of various PPA structures, be it Direct, Sleeved, or Virtual, is essential for any entity engaged in energy procurement and management.

It is important that manufacturers seek advice from professionals who are well-equipped to navigate the complexities of PPAs, from initial drafting and negotiation to ongoing compliance and management, including ensuring that the key contract provisions we dealt with are clear, unambiguous, and fair and reasonable between all parties involved. Ultimately, each PPA must be tailored to meet the specific needs and objectives of each manufacturer, providing a stable, cost-effective, and lasting sustainable energy solution.