In Canada, power purchase agreements are increasingly becoming the quiet workhorses as the energy sector shifts from traditional to renewable power sources. They lock in prices, but they also help lock in lower emissions.
Whether you're a business owner or a future consumer of renewables, this guide is for you. For a deeper explanation of power purchase agreements, you can always reach out to an energy lawyer for electricity near you.
What are power purchase agreements?
Power purchase agreements (PPAs) are contracts between an energy buyer and an energy seller. These are long-term contracts that may last from five years to a decade or longer, depending on the parties.
In a PPA, the seller is a renewable project operator or generator, such as a solar farm or a wind project. The buyer can be a private party purchaser or a public sector entity, which agrees to buy the energy generated by the project.
The renewable energy project may already exist or still be in the planning stage. This aspect of PPAs makes them an investment tool for operators and can provide social benefits for buyers.
The terms of power purchase agreements can specify the following:
- negotiated fixed price of the energy
- term, period, or length of the agreement
- volume of energy to be purchased
- specific rights and obligations of the seller and the buyer
- other common terms (e.g., force majeure, amendments, termination)
A growing number of private corporations and government bodies have committed to Canada's long-term net-zero greenhouse gas emissions goal. This drives more renewable energy projects, which use PPAs to secure future buyers.
In a wider lens, PPAs help ensure income for the renewable energy producers while supporting climate change goals for both parties.
Watch this video to learn more about power purchase agreements:
Interested in entering a PPA? Consult first with the best energy lawyers for electricity in Canada as ranked by Lexpert.
How do power purchase agreements work?
PPAs are long-term contracts between an energy buyer and a seller, where:
- the buyer agrees to take power at agreed prices and volumes
- the seller agrees to deliver that power, either physically or virtually
However, as with any other contract, the terms of a PPA can range from simple to complex and detailed. That's why it’s important to consult an energy lawyer when dealing with PPAs.
Below, we'll further discuss how PPAs work, along with their features:
Types of power purchase agreements
PPAs are flexible contracts that can be adjusted to the needs of the parties. There is no standard PPA, which has led to different types.
Physical vs. virtual
- Physical or sleeved PPA:
- the renewable energy project and the buyer sit in the same grid (or area), and there is a physical transfer of electricity from the seller to the buyer
- a third-party utility often handles the delivery and balancing for the renewable energy project, and the PPA must state how these are managed
- Virtual PPA:
- rather than exchanging physical power, the renewable energy project sells into the wholesale market, and the buyer only receives financial settlements and environmental attributes
- the price usually takes the form of a contract price (also called strike price) under a contract-for-differences, where the parties settle the difference between the contract price and the market price
- in a contract-for-differences, the buyer pays the difference if the market price is lower, but it is the seller who pays the buyer if the market price is higher
Physical PPAs are suited for buyers who want their power supply linked directly to a specific plant. On the other hand, virtual PPAs are popular with buyers seeking price hedging and environmental attributes without changing their physical power supply arrangements.
On-site vs. off-site
- On-site PPA: if the renewable energy is both generated and consumed on the same site (e.g., electricity generated by a solar panel in a facility is also used by that same facility)
- Off-site PPA: similar to virtual PPAs, the renewable energy is consumed in a facility that is different from where it was generated; this is usually used by larger energy projects
Single technology vs. multi-technology
- Single technology: PPAs that only uses one technology (e.g., solar only)
- Multi-technology: PPAs combine more than one technology (e.g., solar and wind) whether in a similar site or spread across different sites
PPAs and RECs
Buyers in power purchase agreements, you might wonder "What's in it for me?" Buyers in PPAs can receive renewable energy certificates (RECs), or similar environmental attributes, in addition to securing green energy.
PPAs usually have the issuance of RECs as one of their components. Buyers in PPAs can claim that they use or patronize renewable energy, since RECs are their evidence of purchasing green or clean electricity.
Protection for sellers
As renewable energy deals increase, so do PPAs and similar contracts. Generators and investors use PPAs to secure returns and support project financing
One way to ensure returns is to secure buyers through PPAs before project completion.
Power purchase agreements can also work as a hedge against unpredictable energy prices. The long-term commitment in PPAs helps the renewable energy project raise financing, rather than buying purely at short-term market prices. This can provide protection from rising energy costs and help make new projects viable.
This video explains why companies and organizations enter PPAs, as well as additional explanations on the different types:
We'll further discuss how PPAs work below. You can also check out Lexpert's Special Edition on Energy Law for more similar articles, including a directory of the leading lawyers in energy law.
What laws govern power purchase agreements in Canada?
With new climate change goals both at both the federal and provincial levels, businesses should be aware of Canadian laws on climate change. These laws can either directly or indirectly affect energy industry operations.
The same applies to power purchase agreements, which may be governed by different laws depending on the parties' locations. Here are some of the laws that parties should take note of:
- laws on contracts: from drafting to implementation, PPAs are governed by the Canadian laws on contracts; it's important that the PPA reflect the intent of the parties to help avoid conflicts and resolve issues
- ESG and net-zero commitments: while violations of these commitments are not directly punishable by law, PPAs can be structured to help companies meet climate, ESG, and net-zero commitments
- provincial and territorial laws: while there is no single federal statute governing PPAs, several local laws may have to be considered when drafting the PPA; for PPAs in Alberta, parties should consider regulations administered by the Alberta Utilities Commission (AUC) and the Alberta Energy Regulator (AER) regarding renewable energy
How can lawyers help clients with power purchase agreements?
Whether you're a seller or a buyer, it's highly advised to get a lawyer if you're entering a PPA. Here are some ways a lawyer can assist when it comes to PPAs:
- clarify terms: lawyers can explain the complex PPA terms, helping you understand your rights and obligations under the agreement
- structure PPAs: when drafting or reviewing a PPA, lawyers can ensure that it aligns with your business, regulatory, and ESG goals
- environmental attributes: in relation to regulatory and ESG goals, lawyers can link RECs and offsets to Canadian compliance and disclosure rules
- risk allocation: lawyers can identify and address risks in the PPA, such as market, credit, construction, and political risks
Power purchase agreements: Green energy contracts for everyone
As more projects connect to the grid, power purchase agreements are becoming standard commercial tools. They sit at the point where corporate budgets, national climate targets, and project finance all meet. In Canada, they play a key role in the development of new renewable energy projects
Clear language on price, volume, risks, and environmental claims in these contracts is essential for the success of these projects. For this, it's important to get the right legal guidance from energy lawyers for electricity, who can help draft, examine, and implement these green contracts.
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