Signing a business power purchase agreement (PPA) can reduce financial risks for buyers and sellers. But renewable energy projects have their own complex risk profile. No PPA can eliminate all of these potential risks, and much of a PPA contract focuses on who bears what risks. There are a number of options for managing outstanding risk. But as the market for PPPs for businesses grows, the time has come to create new innovative insurance and risk coverage products to further boost the energy transition. However, this is only the first step towards “a much more plug-and-play agreement structure," Gimon said. “We need a multilateral entity that can create green energy blocks by obtaining PPAs and smoothing and consolidating them with AFVs. Right now, the process starts with a business buyer`s APP. A central facility could turn any renewable energy production into tradable green energy blocks. Companies like Google, Amazon, Apple and Facebook use power purchase agreements to buy wind and solar power, which offer fixed prices for renewables. However, the performance of renewables varies depending on weather conditions, and PPA holders sometimes have to purchase renewable MW from electricity markets at prices above or below the prices of their PPAs. Microsoft`s Volume Firming Agreement (VFA) converts this fluctuating price into an unchanged, albeit slightly higher, price guaranteed by a third-party insurer and relieves the buyer of the risk associated with the variable price and renewable energy generation. Microsoft and ENGIE have signed a long-term solar and wind power purchase agreement (PPA) structured to provide energy on a permanent basis.

The “volume consolidation agreement" could mitigate some of the risk and volatility of renewable energy purchase agreements and help expand supply beyond large corporate buyers. As the market for AVVs and similar products grows, we believe this will create new incentives for those who now bear these risks to procure storage resources and other assets that can physically balance the intermittent nature of renewables. By aggregating risk, these insurers will be able to raise resources with economies of scale that even Microsoft can`t achieve. In this way, today`s financial strengthening solution is tomorrow`s physical strengthening solution, accelerating the adoption of storage and other resources needed to transition to a 100% carbon-free power generation system. Power purchase agreements have gained popularity in recent years, with large companies entering into more than 14 GW of renewable energy contracts in the U.S. between 2013 and 2018. Tech giants like Google, Amazon and Microsoft gladly signed them under contract because they have a commercial sense. We now know that.

However, these PPAs are still considered too risky by many small and medium-sized businesses. Traditional PPAs set a fixed price for long-term renewables, but the reality is that real market prices fluctuate hourly based on production. If, for example, the wind blows hard and electricity is plentiful, the market price of wind energy decreases – and therefore also the price the buyer receives for their electricity from the grid. This means that the buyer is obliged to “fill" this deficit. Of course, the same thing works the other way around – in times of low resources, market prices are high, and the IPP, which now demands a high price for its power, will share these profits with the buyer. However, this uncertainty deters small businesses. This is where the VFA comes in…