How Power Purchase Agreements (PPAs) and the NZECS work together
Power Purchase Agreements (PPAs) are a type of electricity purchase arrangement that reduce consumer price risk and support the development of new electricity generation. In recent years, there has been a notable surge in PPAs amongst New Zealand businesses.
The objective of this explainer is to assist corporate energy users in optimising their PPA arrangements with the use of the New Zealand Energy Certificate System (NZECS) in order to fulfil their emissions reduction targets, while catalysing a broader positive influence on Aotearoa’s energy sector decarbonisation as a whole.
What is a PPA?
A Power Purchase Agreement (PPA) is a long-term agreement whereby a buyer agrees to purchase electricity from a generator on fixed price terms, offering the project developer more certainty and security around its investment, and providing the electricity buyer with a hedge against the volatility of the retail or spot markets. PPAs are generally a win-win for both renewable generation developers and for corporate electricity users in the wider context of electrification.
The generic term PPA has been adopted and used widely in New Zealand to represent a contract between a generator and a consumer. However, given the nature of the NZ market, a PPA is generally more complicated than this and can take many different forms. For example, many PPAs require the involvement of a retailer or intermediary to manage risk through the provision of a back-up supply (known as ‘firming’). Another common form is a ‘sleeving’ PPA where a PPA is bundled into a supply agreement so the buyer can benefit from the PPA while retaining the convenience of a retailer. In addition, we have seen the emergence of ‘on-site’ PPAs which are commercial mechanisms that enable a party (e.g., a solar developer) to fund and own a solar PV system installed on a company or a household’s roof, including an arrangement to sell that energy to the site tenants.
PPAs’ best practice under leading international standards.
Increasingly, corporate PPAs are considered to be effective ways to procure renewable or low-carbon electricity, in order to reduce an organisation’s reportable emissions. When tracked on the New Zealand Energy Certificate System (NZECS), PPAs adhere to best practice under leading international standards (such as the GHG Protocol Scope 2 Quality Criteria), referred to as a ‘contractual instrument’ under the market-based reporting method.
Generally, an energy user will seek to contract for purchase of electricity from a generator that produces renewable electricity with zero associated carbon emissions, and the PPA will include clauses that grant the purchaser ownership of these production attributes. The use of the NZECS registry will ensure that the transfer of ownership is fully tracked and verified - making sure that each unit of energy is only counted once, and that no one is making false claims.
Why do PPAs rely on the NZECS?
Some features of PPAs should be understood when considering the wider system impact needed to decarbonise New Zealand. For instance, a PPA does not have an in-built verification function, and so the characteristics of generation are not independently checked as being of a certain quality or adherent to prevailing standards. In addition, while a PPA does convey ownership of the environmental benefit of the project to the corporate buyer, it doesn’t make that transfer known to the market, often leading to double counting. A third consideration is that PPAs generally convey information about production in an abbreviated and aggregated form, providing limited granular detail to the buyer, and reducing the incentive for behaviour change.
Ultimately, PPAs can be an effective method for procuring renewable electricity and could have strong potential to accelerate grid decarbonisation. However, to realise their full potential it is likely that they will need to be supported by a detailed verification and attribution process, like that provided by the NZECS.
Maximising system impact by pairing PPAs with NZ-ECs and tracking them on the NZECS.
For the above reasons, to maximise the impact of PPAs and minimise the risk of double-counting, it is best practice to track PPAs (and other energy purchases) on the New Zealand Energy Certificate System (NZECS).
Through this tracking function, the NZECS:
• Provides production verification,
• Issues digital certificates that contain detailed, granular information, and
• Denotes title of ownership.
These energy certificates (NZ-ECs) can be transferred as part of the on-going operation of the PPA.
Tracking on the NZECS ensures that the volumes transacted are removed from the Residual Supply Mix provided to the rest of the country to use, reducing the instances of double counting, and incentivising other businesses for action and behavioural change.
Enabling the transfer of renewable attributes on a PPA.
When considering entering a PPA with a renewable generator, corporate energy users should clarify the following within that agreement:
● Who has the right to the renewable attributes of energy production? Does this remain with the energy producer who is then free to sell the attributes via a NZ-EC to another energy user? Or are the attributes transferred to the energy consumer, who can then use the NZ-ECs to report zero (or low) emissions and confidently make public claims describing their support for that renewable generation? It’s important that the energy producer is appropriately compensated if the attributes are transferred to the energy consumer, and similarly, it is important that an energy consumer does not pay for these attributes if it is not receiving them.
● If the corporate energy user does want the renewable attributes of the generation, then there are two broad options by which they could pay for those attributes:
o Include the value of the renewable attributes in the strike price, and track them on the NZECS, with a NZ-EC cost of $0,
o Not include the value of the renewable attributes in the strike price, and then the corporate energy user has the option to either:
▪ purchase NZ-ECs from the same renewable generator with a cost that should reflect the value of the renewable attributes, or
▪ purchase ‘unbundled’ NZ-ECs from any other renewable generator with the attributes the energy user is after, with a cost that should reflect the value of the renewable attributes.
For the reasons described within this explainer, it is strongly recommended that all attribute transfers are properly tracked as NZ-ECs via the NZECS.
To support corporate energy users, Certified Energy is developing a template clause that parties may use within their PPA to enable the inclusion of NZ-ECs, grant the purchaser immutable ownership of these production attributes, and clarify who is responsible for the NZECS administration fees.