Understanding Corporate Power Purchase Agreements (PPAs) in Greece

This article delves into the evolving landscape of corporate Power Purchase Agreements (PPAs) in Greece, highlighting market trends, legal framework, and key considerations for structuring and negotiating these agreements.

Market trends and developments

In response to the green transition, the Greek energy market is experiencing a progressive transition from state support schemes to corporate PPAs. Historically, the Greek government promoted RES through state support mechanisms, such as the feed-in tariff model established by Greek Law 3468/2006. This model provided guaranteed prices and long-term agreements to RES producers, effectively shielding them from market risks and encouraging investment in renewable technologies.

However, the high financial cost of these schemes, coupled with the Greek debt crisis, led to significant reforms in 2014 and the introduction of the feed-in premium model in 2016. The feed-in premium model, aligned with European Commission guidelines, requires RES producers to participate in the electricity wholesale market, selling generated electricity at market prices while receiving a premium if market prices fall below a reference price.

This shift, along with the introduction of the Target Model and technological advancements, has paved the way for the development of corporate PPAs.

Characteristics of corporate PPAs

Corporate PPAs are typically long-term agreements, ranging usually from 10 to 20 years, between RES producers and various off-takers, such as utility companies, electricity suppliers, aggregators, industries, or major consumers. These agreements are not regulated by law, allowing parties to freely negotiate their terms. Corporate PPAs provide RES producers with long-term predictable cash flows, covering investment costs and ensuring reasonable profitability, which is crucial for project bankability.

To encourage the conclusion of corporate PPAs, the Greek government has implemented several measures:

• Grid connection priority: RES producers with corporate PPAs covering at least 80% of generated electricity for a minimum of 8 years receive grid connection priority (category Β). Recent legislative amendment (March 2024) grants absolute grid connection priority to RES projects supplying electricity to farmers and heavy industrial consumers.
• Suspension and termination options: Under specific conditions prescribed by law, RES producers can suspend feed-in premium PPAs or terminate feed-in tariff and feed-in premium PPAs to enter into corporate PPAs.

Types of PPAs

Physical PPAs vs. Virtual (Financial) PPAs

Physical PPAs involve the physical delivery of power from the generator to the buyer within the same network, often facilitated by a third-party energy trading firm.

Virtual PPAs are financial contracts where the generator sells energy to the buyer at a variable spot price injecting the sold energy to the network. The difference between the market price and the agreed PPA price is settled between the generator and the buyer, acting as a financial hedge against market price fluctuations.

Fixed Volume PPAs vs. Variable Volume PPAs

Fixed Volume PPAs require the generator to deliver predetermined production volumes at specified intervals for a fixed price.

Variable Volume PPAs involve the buyer purchasing all or a significant percentage of the electricity actually produced at a fixed price, with no target production volume imposed on the generator.

Key terms and risk allocation in corporate PPAs

Development risk: This involves the risk of the renewable power plant not being constructed or commissioned on time. Off-takers aim to shift this risk to developers, who, in turn, ensure that deadlines include buffers for delays not attributable to them. Lenders seek to minimize the risk of PPA termination before project commissioning.

Tenor risk: This pertains to the risk associated with being locked into above or below market prices over the contract term. Developers consider market price forecasts and lender requirements to determine the PPA term, while off-takers might seek exit mechanisms to mitigate long-term pricing risks.

Price risk: Price risk involves losses due to market price variations. Developers prefer long-term predictable prices, whereas off-takers favor flexible pricing to mitigate risks. Lenders prioritize project cash flows sufficient for debt repayment, often preferring fixed prices.

Credit risk: The off-taker's creditworthiness is critical for project viability and debt repayment. Developers and lenders mitigate this risk by requiring credit support from the off-taker, though off-takers may resist such requirements.

Performance risk: This risk concerns whether the renewable power plant performs as expected. Off-takers seek performance guarantees and exit mechanisms for under-performance, while developers aim for achievable guarantees and mitigation rights. Lenders align with developers on this risk.

Volume risk: The volume of electricity to be purchased can only be estimated, influenced by factors like meteorological conditions. Many buyers want minimum volume commitments, while developers prefer variable volume PPAs to avoid production volume obligations.

Change in law and regulatory risk: Changes in law can impact the balance of benefits or risks under a PPA. Off-takers typically resist bearing this risk, while developers seek fair risk allocation, particularly where the PPA is the primary revenue source. Lenders ensure that such changes do not undermine project revenues.

Force majeure risk: Force majeure events can delay project construction or operation, impacting production. Parties agree on risk allocation mechanisms, with off-takers wanting specific definitions and termination rights, while developers seek broader definitions and insurance covers. Lenders align with developers on this risk.

Termination clauses: Termination clauses are crucial for lenders as PPAs secure financing. Developers aim to exclude early exit clauses or negotiate termination payments and exclude default events due to third-party non-performance. Lenders seek step-in rights to remedy defaults before termination.

Conclusion

The corporate PPAs market in Greece is maturing, with an expected increase in agreements as government measures and banking willingness to finance RES projects continue. Future measures, such as state guarantees covering price risk and a special platform for corporate PPAs in the Hellenic Energy Exchange, are under discussion to further encourage these agreements. With an estimated 30,000 - 40,000 corporate entities eligible to enter into corporate PPAs, these complex agreements must address diverse stakeholder interests and allocate inherent risks effectively.

Expert legal advisors play a pivotal role in drafting documentation to safeguard stakeholders' interests and ensure project viability. Your Legal Partners has established a dedicated team that specializes in Renewable Energy Projects (M&A, Project Finance, Corporate PPAs), comprising legal experts from various practice areas within the firm, pooling the knowledge to address the particularities of the renewable energy market.

By Prokopis Linardos, Partner, Your Legal Partners