Our Position on Cross-Border Power Purchase Agreements (PPAs)

At AYA, we are enthusiastic about the benefits of Power Purchase Agreements (PPAs) for enhancing energy security and sustainability. However, when it comes to cross-border PPAs, some additional specificities and risks must be tackled.

?? Cross-border PPAs are not for every corporate: Cross-border PPAs can look very attractive in the sense that they open to more project optionality, allow multi-country load coverage, enable stacking of different geographies production patterns to better fit a corporate load, etc.

The LCOE of a specific technology can also be way cheaper looking at other geographies compared to what is available in the country/market where the corporate consumption is. Yet, these agreements come with additional risks that need to be assessed, priced, and born by one or both of the parties to a CPPA.

?? Basis Risks: on top of all the usual price risks any PPA intrinsically contains, a cross-border PPA will be also exposed to basis risk. This is the risk of de-correlation between the prices of the markets where production and consumption happen. There are tools and methods to assess this risk for the PPA duration, but in the end, it means more uncertainty for the performance of a cross-border PPA. Many European national electricity markets are going through a massive ramp-up of renewables capacity, which brings more uncertainty for next years on how electricity prices will correlate.

If a virtual cross-border PPA is settled on the market where production happens, this contract will embark additional risk for the offtaker than a single-country approach. On the contrary (settlement on the consuming market), the price to be paid by the buyer will be significantly higher, potentially cancelling the expected advantages of lower LCOEs.

?? Regulatory Uncertainties: Regulatory changes can also impact the value and feasibility of cross-border PPAs, adding further complexity and risk. A few examples:

• Renewable energy attributes (e.g. guarantees of origin) must be transferable between the country where the production happens and the country where the load to be covered is situated.
• Fiscal/accounting risk must be assessed. The way a (virtual) PPA impacts the accounting and reporting obligations of the parties in the different countries involved in a PPA makes it more complex
• Taxes: the energy crisis has proved that EU member states can adopt very different methods to tax renewable energy-producing assets or compensate energy consumers. Any cross-border PPA is exposed to more risk that the balance of the contract would be put at risk at some point. ??

Our Recommendation: While PPAs are a powerful tool, we advise caution when considering cross-border PPAs. It is crucial to look beyond just the Levelized Cost of Energy (LCOE) and carefully assess risks and regulatory issues.

Thomas Schmits, Head of PPAs and Flexibility, highlights our perspective:

“PPAs can significantly improve energy budget certainty, but cross-border PPAs come with inherent risks. Beyond LCOE, factors such as basis risks and regulatory uncertainties play a crucial role in determining their viability.”

At AYA, we have extensive experience with PPAs and keep a close watch on market developments. We encourage businesses to consult with their Energy Managers to navigate these challenges and align their energy strategies with economic goals and sustainability commitments.

?? Interested in discussing how to address the challenges of cross-border PPAs? Let’s connect!

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