Partner Düsseldorf
"Heavy industry needs to undergo a significant transition in their production processes using much more renewable electricity and/or green hydrogen."
To achieve climate neutrality, the use of renewable energy must increase steadily. This puts a particular onus on heavy industry businesses as major consumers of electricity and reinforces the key role “green” hydrogen will play in their quest for net zero. Not only must the German government proactively implement its climate action plans, heavy industry also needs to recognise and adapt to the significant transition in their electricity and/or hydrogen consumption this will entail. This makes the energy transition a key issue for management boards. Whilst some companies install renewable energy facilities such as photovoltaic systems or wind energy turbines themselves, others rely on Power Purchase Agreements (“PPAs”). The role of PPAs in the journey to net zero is becoming increasingly important with operators of hydrogen electrolysers often needing to purchase electricity from renewable sources to ensure the hydrogen they produce qualifies as “green”.
Despite the increasing importance of PPAs between electricity producers and consumers, there is no uniform contractual standard in Germany. Rather, contractual arrangements are tailored to individual needs and requirements and consequently depend on distinct specifications, such as whether the electricity is purchased for final consumption or hydrogen generation. These requirements can also affect the length of the PPA, with long-term contracts generally used when it is crucial for the financing of a renewable energy plant, and short-term when the electricity is generated in an older facility.
Key Contractual Elements of a PPA
"The role of PPAs in the journey to net zero is becoming increasingly important."
PPAs qualify as purchase contracts under German law and some key issues regularly include:
- start date: whether the start date is fixed or within a certain timeframe is a key negotiation issue between parties;
- duration/term: this is determined by the expected lifespan of the plant and its commercial considerations as well as the underlying financing agreement;
- design of the purchase obligation: depending on the individual situation, the purchase obligation can refer to a “fixed-volume” for fixed amounts of energy, “as-produced volumes” for the entire energy produced or “as-forecasted” for volumes referring to a certain forecast;
- availability: provisions on the availability of the generation facility are also crucial depending on whether it is a new or old generation facility;
- pricing: this can include the duration of the PPA as well as whether the pricing plays a fundamental role in the financing of the construction and/or operation of the renewable energy facility; and
- green hydrogen: if the electricity is purchased for hydrogen electrolysis purposes, a complex regulatory framework must be considered and reflected accordingly in the PPA. Failure to do so runs the high risk of the hydrogen not qualifying as “green” which can result in potentially damaging consequences.
"Contractual arrangements are tailored to individual needs and requirements and consequently depend on distinct specifications."
PPAs in action
There are numerous opportunities for using PPAs in the quest towards net zero. The expansion of offshore wind energy, for example, offers great potential as there are high volumes entering the market. Under Sec. 17 para. 1 WindSeeG, bidders for new offshore wind projects must provide that a certain share of the electricity generated is marketed through PPAs.
Where electricity from a new offshore wind farm is to be used to generate green hydrogen a wide range of legal aspects must be considered and reflected in the PPA. This includes obligations relating to the introduction of bidding zones that split Germany into two or more power price regions; with the hydrogen’s green status endangered depending on the location of the wind farm and the electrolyser.
Given the complexities involved, expert legal advice is strongly recommended to evaluate a project’s individual risks and requirements and correctly address them in the contractual design of a PPA. WFW have unrivalled expertise advising on PPA contracts. If you would like us to help you through such a process, please do reach out to this article’s author or, if you are already a client, to your regular WFW contact.
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