Energy Markets

Electricity Price Cap & Power Purchase Agreement

December 20, 2022

Since Friday, December 16, 2022, the Electricity Price Cap Act, in German “Strompreisbremsengesetz” has been passed, "StromPBG" for short. This legislation aims to skim off windfall profits resulting from sharp rises in electricity prices to protect electricity consumers from rising electricity prices.

The German government estimates that this will increase state revenues by a double-digit billion euro amount. However, in the market for Power Purchase Agreements (PPAs), this law reduces the incentive for green power suppliers to conclude such contracts. This negative effect is described below using the example of a Virtual PPA.


Impact of the electricity price cap on virtual PPAs

Video will be only available in German

The following diagram shows how such a power contract works. First, a Virtual PPA is concluded between the operator of a renewable energy plant (producer) and an institutional electricity consumer. The diagram assumes that the producer and the consumer have agreed on a fixed price of 150 EUR/MWh. 

In case 1, the market price is 350 EUR/MWh, so the producer has to pay 200 EUR/MWh to the consumer for each contracted unit of quantity. In case 2, the market price is 60 EUR/MWh, so the consumer has to pay 90 EUR/MWh to the producer for each contracted unit. The parties transfer the respective market price deviations from the agreed fixed price.

This diagram shows how a power contract works.

The electricity price cap acts both on the side of the producers of green electricity and on the side of the electricity consumers. §18 Strompreisbremsengesetz in conjunction with §2 (9) StromPBG regulates the skimming of revenues of electricity producers under Power Purchase Agreements (so-called "surplus revenues in case of plant-related marketing").

According to this regulation, the amount to be skimmed off is calculated from the agreed fixed price of the PPA and the contracted electricity volume of an existing plant for green electricity. 90% of the resulting fixed price is skimmed off, with the regulator granting the producer a safety margin of 10 EUR/MWh. 

In the above example, the skimming would, therefore, not refer to the market price but to the agreed fixed price of 150 EUR/MWh. Assuming a production of 50,000 MWh in the reference period, the skimming amount under the electricity price cap is calculated as follows:

(150 EUR/MWh - 10 EUR/MWh) x 90% x 50,000 MWh = 6.30 m EUR

In case 1, however, the producer's payment obligation to the consumer under the Virtual PPA would already be 200 EUR/MWh x 50,000 MWh = 10 m EUR. With skimming, the producer would thus incur a total cost of 16.3 m EUR. Due to this high payment burden, the incentive for the producer to conclude a Power Purchase Agreement during the skimming period decreases.

For institutional electricity consumers, the market for Power Purchase Agreements is getting smaller. For consumers with annual electricity consumption above 30 MWh, the cost of electricity is subject to a price cap of 130 EUR/MWh for 70% of yearly consumption. The electricity consumer is exposed to market price fluctuations for the remaining 30% of consumption volume. In the case of Case 1 and an annual electricity consumption of 40,000 MWh, the calculation is as follows:

Cost 70% consumption: 130 EUR/MWh x 70% x 40,000 MWh = 3.64 m EUR
Cost 30% consumption: 350 EUR/MWh x 30% x 40,000 MWh = 4.20 m EUR

Accordingly, the total cost to the consumer is EUR 7.84 m. In comparison, a non-skimmed Virtual PPA would result in a total position of 6.00 m EUR (150 EUR/MW x 40,000 MWh).

This example shows that government skimming can be more expensive for end users than a private sector solution in terms of a Power Purchase Agreement. Especially if the electricity price is high. It would be helpful, at least, if PPAs were not skimmed for the "uncapped" 30% of electricity consumption. However, this constellation remains vague in the adopted draft law of 16.12.2022.