Green PPAs: Popular new Risk Management Against Energy Price Volatility

Inside View

László Kenyeres, partner, Wolf Theiss Budapest (left) and Ádám Lukonits, associate, Wolf Theiss Budapest

Solar energy has been the fastest-growing energy generation technology of the last decade. It is also gaining ground in Hungary in the industrial, corporate and residential segments.

The government has already launched various support schemes. For example, in addition to the widely known and oft-praised METAR tenders supporting mostly industrial power generation, there is also a residential solar tender offering a 100% state subsidy and a home renovation program with a 50% state subsidy; both are very popular among residential consumers.

However, industrial and corporate consumers are in a different situation compared to the residential sector. For example, many companies, such as those in the metal and chemicals industries whose energy bills represent a significant proportion of their cost structure, are painfully affected by the increase in electricity prices and are not protected by those energy prices kept forcibly low by the government, and which are available for households and small- or medium-sized enterprises. The availability of solar technology that can cope with higher consumption needs may, therefore, be a priority for these large companies. Some have the option of installing solar panels on their roofs or investing in other types of renewables projects, while others can only consider a green power purchase agreement (PPA) due to their specificities.

What are PPAs and how do they come into play when discussing solar energy? PPAs are contractual agreements between buyers (off-takers) and sellers (generators) on the sale and purchase of a specific amount of electricity that is (or will be) generated by a renewable asset. PPAs are usually signed for a long-term period of between 10-20 years.

PPAs can provide security that the project will bring a return on the capital investment upon completion by selling the project’s future energy generation over the long-term to a designated buyer, which can reduce cash flow uncertainty even without a state subsidy. It can optimize the risk/return ratio by managing the (sometimes extremely volatile) changes in energy prices. PPAs can also be helpful for investors in securing third-party funding for their projects as the off-taker’s long-term commitment to pay an agreed price for the electricity can raise financiers’ confidence in the project.

For industrial or corporate consumers, perhaps the most critical aspect is the capability to manage the price volatility risk. If a consumer can pay a fixed price for the electricity for a longer tenor, this can significantly improve productivity and cost efficiency, which can be an enormous advantage in the market. It also enables a company to (indirectly) fund a renewables project and receive guarantees of origin or other types of green certificates directly from the green producer. Therefore, not only the generator can ensure a secure future stream of revenue, but the off-taker can also hedge the volatility in energy prices by purchasing a certain amount of energy at a fixed cost and, at the same time, contribute to achieving its own ESG targets.

It is, therefore, no surprise that PPAs are becoming more popular in Hungary and that banks and other stakeholders are becoming more open and interested in the topic.

Somewhat counteracting these trends is the fact that solar power is a weather-dependent energy source, and the companies operating the transmission and distribution grids have a hard time managing too much variability. The Hungarian transmission system operator (MAVIR) has just put a permanent halt to project developments and is only accepting new industrial-scale solar capacity under very tight conditions as the technical possibilities ran out. This could slow the uptake of PPAs and temporarily limit them to projects built or under development that have already secured proper grid connection.

Overall, as PPAs are still relatively new in Hungary, facing significant restrictions and regulatory hurdles, therefore ongoing up-to-date legal assistance is essential for investors, consumers and financiers interested in this type of risk management structure.

This article was first published in the Budapest Business Journal print issue of June 3, 2022.

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