Understanding PPAs

Understanding Power Purchase Agreements for Embedded Generation

Published: 03/03/2025

4 - minute read time

Explore Your Options for Maximising Revenue

The rapidly evolving energy market offers numerous opportunities for embedded generators to maximise their revenue through various contract types. Whether you're a seasoned generator or a newcomer to the field, understanding the intricacies of Power Purchase Agreements (PPAs) is crucial for making informed decisions.

Following on from our recent blog 'Embracing Embedded Generation' we continue this theme and explore the different PPA options available in the UK market for those generating their own power, providing valuable insights to help you navigate and optimise your energy contracting strategy. Join Daniel Gell, from our UK PPA team as he explores the key aspects of Fixed Price PPAs, System Price PPAs, Indexed PPAs, and Standard Baseload PPAs, ensuring you have the knowledge to choose the best path forward for your energy generation assets. 

As a generator there are many approaches you can take when contracting with an offtaker (an offtaker could be a large utility company, corporation, or a government entity) in the UK. For established generators this can be an easy decision to make based on experience, asset type and general approach to risk management. However, with more generators entering the market it is key to ensure that information is available to assist with putting together requests for prices as assets approach commissioning. Below, I've put together a summary of the contract types you may find on offer in the UK market - all of which our UK PPA team would be happy to talk through.

PPAs explained...

A Power Purchase Agreement is a long-term contract between a renewable electricity generator (the seller) and a buyer (often a company, such as TotalEnergies). The PPA defines the conditions of the agreement such as the volume of electricity to be supplied, prices and compliance terms. Here's a breakdown of how they work:

The Agreement: The buyer agrees to purchase electricity at a predetermined price for a specified period.

The Generator: The seller, who owns and operates the energy asset/generator produces electricity which goes into the grid.

The Offtaker: The buyer, who purchases the energy and associated green credentials from the asset.

Fixed Price PPA

A fixed price PPA is often a popular low risk option in which the generator receives a fixed price from the offtaker for each unit of power exported for the duration of the PPA, this price is then paid for all electricity exported to the grid and is often referred to as a 'Pay as Produced' PPA. Although this can be a simple option for the generator, there are important considerations for the offtaker around technology type and the shape and consistency of the generation that will directly correlate with the discount to spot market pricing that can be offered.

System Price or Spill PPA

A straightforward option - this puts an asset onto a price linked to the published price system. This is a low risk offering for an offtaker as no volume is forward hedged. For this reason, these types of products often attract the lowest fees. It allows generators to avoid the complexities of forward markets while ensuring a market-based return for their power generation.

System Price with forward hedging or Fully Flexible PPA

As with the above, but with the ability to forward hedge volumes (any unhedged volumes settles at the system price). Often the imbalance risk will still sit with the generator, so any hedges will be balanced at market prices (system/N2EX DA) if over and under production occurs, which in turn will impact your final delivered price. This option provides more control over revenue streams, allowing generators to lock in prices for future periods while still benefitting from spot market rates for unhedged volumes. 

Indexed PPA

This option is like the system price contract previously described, but the outturn price will be based on a selected index normally day ahead N2EX. There is often a small fee to pay to access the index and the contract will be pay as produced against the published rate at your actual generation times (per half hour). Although there are models available that will track to a pre-agreed average as opposed to the half-hourly prices, this option allows for a mix of spot market exposure and indexed stability, offering a balanced approach to price risk management. 

Standard Baseload PPA & Shaped Contracts

TotalEnergies Gas & Power offers a unique, transparent approach to generators throughout the UK with our Standard Baseload PPA, some similar formats of this product in the market may be referred to as 'baseload only' or 'shaped' PPAs. This contract type provides flexibility to forward hedge volume or price on an index, with a pre-agreed and fixed 'risk and shape' fee. This assists generators with revenue forecasting by having a known discount to OTC live market prices for the full length of the contract. Additionally, volumes are shaped and pre-agreed to create a firm purchasing shape, without penalties for over or under production within a single month. Embedded benefits, REGO pricing, and associated contract fees are priced upfront, providing flexibility and price certainty for generators. This option is particularly beneficial for generators looking to secure predictable revenue streams while maintaining operational flexibility.