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When concluding Power Purchase Agreements (PPAs), various risks play a central role. These include uncertainties in actual electricity production (volume risk), fluctuating market prices (price risk), possible payment or delivery difficulties for contractual partners (counterparty risk) and price discrepancies in cross-border electricity supplies (basis risk). A well-founded risk analysis is therefore essential to make PPAs successful and sustainable.
The volume risk results from uncertainty regarding the real power generation of a renewable energy plant. Depending on whether a fixed or variable volume structure has been agreed as part of the PPA, the electricity producer or the end user bears the volume risk.
In a Pay as Produced PPA, the end consumer bears the volume risk. These PPAs entail the risk that the end user will not receive the amount of electricity required to maintain their business activities and the associated guarantees of origin. In this case, the buyer must buy the missing quantity at variable market prices. Companies that conclude PPAs typically manage this risk by building a diversified procurement portfolio that consists of several types of contracts with different renewable energy technologies. Since the end consumer bears the volume risk in a Pay as Produced PPA, lower PPA prices can generally be achieved compared to a fixed volume PPA.
In a fixed volume PPA, the electricity producer bears the volume risk. In the event of underproduction of the plant, it must obtain the residual amount of electricity and the associated guarantees of origin at variable prices on secondary markets and deliver it to the end user.
Price risk is defined as uncertainty about the actual level of the market price at a specific point in time. As a result, price risk is the difference between the expected value and the real market price (also known as price volatility).
By fixing a PPA price for the long term, the price risk, i.e. uncertainty about future price developments, is eliminated. By fixing the price, both contracting parties avoid the risk of unfavorable price developments, i.e. the possibility of rising prices from the off-taker's point of view and falling prices from the SPV's point of view. However, designing the PPA as a fixed-price contract results in opportunity costs resulting from the loss of profit from a price development that is favourable for the respective contracting party, since fixing the price also prevents the possibility of participation in such a development.
The counterparty risk is the risk that at least one of the parties to a virtual or physical PPA is unable to pay the contractually agreed invoice amount or cannot deliver the contractually agreed amount of electricity. This also includes the case that although the amounts are paid or delivered in the contractually agreed amount, payment or delivery is made later than agreed. This risk can be managed by agreeing and setting collateral in the PPA contract.
Cross-border PPAs must also take into account the basic risk. A basis risk occurs when electricity producer and end user are not in the same electricity price zone and therefore the market price for the physical consumption of the end user does not match the market price for the physical supply of electricity by the producer.
