A PPA is a long-term electricity supply agreement entered into directly between an electricity generator and the end consumer. In practice, this means moving away from the standard model of purchasing energy from a trading company based on short-term price offers and switching to a contract whose key parameters – price, volume and duration – are individually negotiated by the parties.
From the entrepreneur’s perspective, a PPA is a tool enabling long-term energy cost planning, but at the same time requires acceptance of certain contractual and operational risks. For this reason, it is essential to understand the structure of such an agreement, as well as its legal and economic consequences, before entering into it.
Types of PPA agreements – basic models operating on the market
The term ‘PPA’ encompasses several different contractual models. Distinguishing between them is crucial for assessing whether a given structure is suitable for a specific business.
Physical PPAs and Virtual PPAs
The basic distinction is between physical PPAs and virtual PPAs (VPPA).
In the case of a physical PPA, electricity is actually supplied to the consumer – either directly or via the electricity grid. Such an agreement is similar in effect to a traditional energy sale, but its structure is much more complex, and the terms of supply and settlement are determined individually by the parties.
A virtual PPA does not involve the physical delivery of energy between the generator and the consumer. The agreement is a financial settlement in which the parties compare the price set in the contract with the market price of energy, and the difference is settled in cash. The consumer physically purchases the energy from another supplier, whilst the PPA acts as a price hedge.
On-site PPAs and off-site PPAs
The second key criterion for classification is the location of the energy source relative to the consumer.
In the on-site PPA model, the generation facility (usually a photovoltaic system) is located on the business’s premises or in its immediate vicinity, and the energy is consumed on-site. This model is characterised by simpler supply logistics and less dependence on the electricity grid.
In the off-site PPA model, the energy source is located outside the consumer’s premises, and energy is supplied via the grid, usually involving an entity holding an energy trading licence. This is currently the most common form of PPA for larger industrial consumers.
In practice, there are also intermediate structures, including PPAs based on a direct line between the generator and the consumer.
What is the process for concluding a PPA?
Concluding a PPA is a multi-stage process and differs significantly from concluding a standard energy supply contract. In practice, it takes anywhere from a few to over a dozen months.
The first stage involves analysing the business’s energy requirements, covering both consumption volume and its profile over time. At this stage, it is crucial to determine whether the business is able to commit to a specific amount of energy in the long term and how changes in its operations might affect the fulfilment of the agreement.
The next step is the selection of a PPA model and a preliminary economic analysis, often comparing the PPA with alternative forms of energy procurement. This is followed by commercial negotiations with potential generators, during which the basic terms of the contract are agreed.
An important element of the process is due diligence on the generation project, covering, among other things, the legal status of the installation, grid connection conditions and the generator’s ability to deliver power. Only once this has been completed is it possible to proceed to the actual negotiation and signing of the PPA.
Legal aspects of PPAs in Poland
Under Polish law, a PPA is an unnamed contract based on the principle of freedom of contract. However, its performance must comply with the provisions of energy law and energy market regulations.
Licensing issues are of key importance – in particular, the role of the entity holding an energy trading licence in physical PPAs. The rules governing the use of the electricity grid are also significant, including the obligation to enter into distribution agreements or to meet the requirements for a direct line.
Due to the lack of detailed statutory regulation of PPAs, the precise drafting of the agreement takes on particular importance, covering, amongst other things, the rules governing supply, settlement, the parties’ liabilities, financial security and the grounds for terminating the agreement. The long-term nature of the contract means that provisions concerning the transfer of rights and obligations and dispute resolution also have significant practical importance.
Business benefits of entering into a PPA
From an entrepreneur’s perspective, the primary benefit of a PPA is the stabilisation of energy costs over the long term. The agreement allows for the setting of an energy price or a transparent indexation mechanism, thereby limiting the impact of market fluctuations on operating costs.
A PPA also facilitates long-term financial planning, making it easier to assess the profitability of investments and negotiate with financing institutions. Under certain structures, it is also possible to reduce the total cost of energy, for example by limiting intermediaries’ margins or certain network charges.
Additionally, the business gains greater control over its energy source and can base its procurement strategy on a single stable contract, rather than annual renegotiations of energy sales agreements.
When does a PPA make sense?
A PPA is not a suitable solution for every business. It works best for entities with a relatively stable energy consumption profile and the ability to plan for the long term. However, with the right fit of the PPA model and careful legal and economic preparation, it can be an effective tool for managing energy costs and mitigating market risks.
Frequently asked questions
How does a PPA agreement differ from standard energy purchase from a trading company?
A PPA is a long-term contract concluded directly between a producer and a consumer, in which the price, volume and duration are individually negotiated. This represents a departure from the purchase model based on short-term price offers, allowing for long-term cost planning.
What is the difference between physical and virtual PPA?
In a physical PPA, energy is actually delivered to the consumer, which resembles a classic sale, though with more elaborate conditions. In a virtual PPA, there is no physical delivery, and the contract serves only for financial settlement of the difference between the contract price and market price, while the consumer purchases energy from another seller.
What do the on-site and off-site PPA models mean?
The on-site model means that the generation facility is located on the entrepreneur’s premises or in its immediate vicinity, which simplifies delivery logistics. In the off-site model, the energy source is located outside the facility, and delivery takes place through the electricity grid, which is a common solution for large industrial consumers.
How long does the PPA agreement conclusion process take and what are its key stages?
This process usually takes from several to several months and includes analysis of energy demand, model selection and commercial negotiations. An important element is conducting due diligence of the generation project, which must be completed successfully before starting actual negotiations and signing the agreement.
What are the main business benefits resulting from concluding a PPA agreement?
The primary benefit is stabilization of energy costs over a long time horizon, which limits the impact of market fluctuations on the company’s budget. The agreement also facilitates long-term financial planning, may reduce the total cost of energy by limiting intermediary margins, and provides greater control over the power source.
For which entrepreneurs is a PPA agreement most suitable?
A PPA agreement works primarily for entities with a relatively stable energy consumption profile that are able to commit long-term to a specific amount of resources. This is not a solution for everyone, but an effective tool for companies capable of long-term planning and accepting contractual risks.
Running a company with a matter to resolve?
That is where most conversations with a lawyer begin. A consultation is paid, PLN 600 net. You pay for a real opinion: whether you have a legal problem, what you can do about it and roughly what it costs. It ties you to nothing further, and you do not need to know the law, that part is on us.
- 1 Talk
You tell us what is going on, in your own words.
- 2 What next
We tell you your options and what it costs.
- 3 We act
You give the go-ahead and the matter is ours.
She specializes in commercial and civil law. She has gained experience in Warsaw law firms providing comprehensive services to companies and a law firm specializing in labor law. She has extensive experience in corporate consulting. She has participated in mergers and acquisitions at every stage of the process, from pre-transaction legal examination to fulfillment of regulatory requirements related to the transformation process. She prepares and reviews contracts entered into by clients and advises in cases of…
View profile →
