Hybrid PPA: A New Opportunity for Energy-Intensive Consumers, Generators and Traders

During the conference held at ADVANT Nctm's Milan office on 11 March, a new opportunity for the future of the electricity market was discussed. Hybrid PPAs can indeed represent a more advanced meeting point between the demand of energy-intensive consumers and the supply of traders and IPPs.

The Distinctive Features of a Hybrid PPA

A Power Purchase Agreement — PPA — is, in its most basic form, a long-term contract whereby a renewable energy producer transfers its output to a buyer — typically an industrial consumer or a trader — on predetermined terms, thereby avoiding the volatility of the spot market.

The traditional pay-as-produced PPA has features that have certainly facilitated its uptake, particularly in Italy: volume risk is clearly allocated, the bankability of multi-year contracts with creditworthy counterparties is high, and the production profile of a photovoltaic or wind plant does not necessarily match the buyer's consumption profile. It is precisely this last feature that, in future market developments, could constitute a limitation to the further expansion of long-term contracts.

The Hybrid PPA was created precisely to overcome this potential limitation, combining one or more generation sources and BESS in an integrated structure. The addition of storage makes it possible to transform an intermittent and otherwise unmanageable production profile into one that more closely matches the consumer's needs. In essence, the BESS, together with trading activities, makes the product — the energy delivered to the end customer — qualitatively different from the basic as-produced output of a single renewable plant.

The Subjective Structure of the Hybrid PPA: Actors and Rationales

From a structural standpoint, a physical Hybrid PPA may involve the interests of a plurality of parties: the holders of renewable energy generation plants, the holders of storage systems, the trader acting as aggregator, the energy-intensive end customer, and the technology supplier/EPC Contractor. It is worth pausing on each of them, as the complexity of the Hybrid PPA stems precisely from the need to balance interests that do not always converge spontaneously.

The energy-intensive end customer has a clear priority: to receive energy in baseload form, with delivery at the PCE and Guarantees of Origin in relation to the volumes covered by the Hybrid PPA.

The trader has a twofold main interest: to present the energy-intensive end customer with a product that is as attractive as possible, while at the same time maximising its own margin by keeping the prices paid to the generator under the PPA and to the storage holder under the tolling agreement as low as possible. The trader's commercial objective is to enter into a PPA that is as close as possible to a Pay as Nominated arrangement with the generator — i.e. a Pay as Produced with a guaranteed minimum monthly volume — with delivery at the PCE.

The storage holder is primarily interested in receiving from the trader a fixed fee or a floor under the tolling agreement, such as to make this solution preferable to — and compatible with — any alternative means of valorising the storage capacity, including participation in the Capacity Market.

The Plant SPV aims to stabilise its revenues by entering into a PPA at the highest possible price, while ensuring the bankability of the contract.

Protection Requirements: Guarantees and Bankability

One of the most sensitive — and practically relevant — aspects of this contractual architecture concerns risk management and the structuring of guarantees among the parties, including the technology supplier and EPC Contractors, also for bankability purposes.

The trader will seek to protect itself against the various risk fronts by requesting the delivery of guarantee instruments.

The Regulatory Framework

In this context, the enabling role of public instruments also comes into play: the Energy Release, the FER mechanisms, including FER Z, the MACSE, the Capacity Market, the MPPA and public guarantees, as well as the need to regulate the coexistence and interaction between public incentivisation and private contracting.

Will the PPA market finally take off, or will it remain marginal compared to the public schemes managed by the GSE? Will FER-Z — with its decentralised structure and incentivisation of profile delivery — contribute to the growth of the PPA market, or could it prove to be a limitation?