Corporate organizations account for about two-thirds of the world’s final energy consumption, which is why they will play a key role in decarbonizing the economy by 2050. Until recently, most companies treated purchasing of electricity as a cost to be managed, rather than a strategic area of risk reduction and value creation. This has changed in recent years, as there are many options for companies to reduce greenhouse gas emissions from the electricity they consume.
The most popular options include:
- Investment in own generation sources (also onsite)
- Purchase of a Guarantee of Origin
- Corporate Power Purchase Agreements (cPPAs)
cPPAs allow the purchase of energy from Renewable Energy Sources (RES) at a predictable and competitive price over the long term.
What are power purchase agreements, and why are they important?
Power purchase agreements (PPAs) consist in the direct purchase of electricity from a producer generating from renewable energy sources (RES). They allow for long-term determination of the price for electricity with lower volatility than the market. The PPA approach thus allows companies to reduce (or even completely eliminate) the risks and challenges they have recently faced in sourcing their electricity.
PPAs allow for a high degree of flexibility in customizing solutions to suit your needs. And they do not limit the location of the potential generation sources, increasing the possibility of obtaining the best price offer.
PPAs come in a wide variety. The two main types are:
Physical PPA
The subject of a PPA based on actual deliveries is the sale of electricity from the producer directly to the user. The sale price for electricity from the installation is fixed or may be adjusted by a coefficient agreed between the parties. In this case, the benefit for the user is long-term energy consumption at an attractive and predictable price.
Financial (virtual) PPA
A PPA based on a mechanism for difference is a purely prospective contract involving financial transactions between the parties, depending on the current situation on the energy market. A contract for difference is based on mutual payments, depending on movements on the wholesale market. In this system, the producer sells energy directly on the wholesale market or to a selected trading company.
There are also different price variants in PPAs (indexed price, price corridor), as well as different quantity variants (pay-as-produced, pay-as-contracted, pay-as-consumed).
Challenges of companies from PPAs
For a long time, companies have looked at power purchasing issues primarily through the prism of costs, not risk reduction or generating added value. The energy transition practitioners at KPMG offices have observed considerable changes in this area in recent years, resulting from pressure from stakeholders or public policies. However, they stress the growing interest of companies in reducing their greenhouse gas emissions. In addition to measures to improve energy efficiency or invest in companies’ in-house RES generation capacity, interest in PPAs is also growing.
Entering into a PPA is a complex process, and it is still a new solution on the Polish market. Implementation requires special attention when setting goals and negotiating contractual terms. Any oversight in seemingly trivial issues may result in significant losses on the buyer’s part. Due to the long contract terms (e.g. 5 to 15 years), it is vital to obtain the best possible conditions (including prices). The PPA market is relatively new in Poland, so it can also be very difficult to find counterparties willing to sign a PPA.
Benefits of acquiring electricity under a PPA
KPMG’s support in long-term purchasing of green energy
KPMG experts support companies throughout the process of developing and signing PPAs. With our support, the risk of an unfavourable contract is minimised, which we achieve through an integrated approach - we offer both technical and commercial advice, as well as accounting and legal advice. The scope of our services includes, in particular:
- Identifying strategies for PPAs and developing acceptable pricing terms,
- Identification of entities capable of supplying energy under a PPA, preparation of requests for proposals and substantive support in conducting procurement proceedings,
- Preparation of dedicated analyses of consumption and generation profiles of RES assets,
- Preparation of entire contracts and legal revisions of provisions,
- Support in the negotiation of PPAs,
- Accounting and tax support in determining the possible consequences of a PPA.
We help our clients both to implement the PPA strategy locally and to use our global network to find opportunities to achieve a wider implementation of PPAs in corporate strategies.
How do we help? | PPA implementation process model
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