Power Purchase Agreement

What are merchant Power Purchase Agreements?

December 3, 2021

Merchant Power Purchase Agreements (also called a utility PPA) are standardized contracts that can be closed between the owner of renewable energy assets and a utility/energy trader acting as the corporate buyer. However, a merchant PPA can also be completed between a corporate or public institution and a utility/energy trader working as a supplier.

Merchant PPAs can be divided into Green Tariffs and Green Premiums. The first is a long-term contract for energy-intensive clients. The latter has a short-term tenor for medium and small companies and the residential sector. The PPA energy can be delivered in bundled EACs, but the offtaker's sustainability largely depends on the liquidity and investment strategy of the utility/energy trader.


  • How do unbundled Energy Attribute Certificates (EACs) work?
  • What is the meaning of unbundled EACs for Offtakers and Developer?
  • Global Overview of Unbundled EACs

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Merchant Power Purchase Agreements (Merchant PPA) are long-term contracts between a utility or energy trader (also called Utility PPA) and an electricity-consuming offtaker (e.g., corporate or public institution) for the delivery of electricity under a specific price scheme.

How do unbundled Energy Attribute Certificates (EACs) work?

Energy Attribute Certificates (EACs) follow a lifecycle and have a maximum lifetime of one year. They are used for documenting and tracking the exact location where the renewable energy is produced.

There are several EAC markets like Guarantees of Origin in Europe, Renewable Energy Certificates (RECs) in the USA etc. Energy Attribute Certificates can be traded on those secondary markets but not across different EAC schemes.

What does merchant PPA stand for? Merchant Power Purchase Agreements stand for standard contracts between a seller of renewable energy and an electricity-consuming buyer for the delivery of electricity under a specific price scheme. In the context of renewable energy, Merchant PPAs are contracted covering the delivery of renewable energy provided by the utility and the corresponding Energy Attribute Certificates. These EACs are devalued by the seller on behalf of the client for documenting and proving the origin of renewable energy.

The first significant problem from a buyer’s perspective is that Utility PPAs cannot deliver 100% renewable power physically (physical PPA). This is a problem unless the utility or energy trader for the PPA energy generates or buys its sold energy solely from renewable energy plants. The second major problem is that a buyer cannot directly induce a renewable energy plant to build and connect to the grid. There are two major types of Merchant PPAs:

  • Green Tariff Programs
  • Green Premium Programs

Both categories look mostly similar on the first view but are different in terms of contractual structure and their potential to prove sustainability from electricity consumers' perspective.

Rotating PPA Globe
Global Overview for Green Merchant PPAs (Green Tariffs & Green Premiums)
Disclaimer: The countries shown in the table do not imply any acceptance,
advise, or endorsement by Think RE

The potential bidders have to fulfill specific registration criteria according to the Terms and Conditions of the EEX. Therefore, only companies having signed a clearing contract with EEX, such as Utilities and Energy Traders, are allowed to bid for GOs, which are then bundled Green Tariffs / Utility PPAs.

Therefore, corporate buyers are not allowed to participate directly in those standardized markets.

EAC markets are “over the counter” and less transparent for electricity consumers. There is a limited direct access to EAC markets and the fact that bilateral transferred EACs usually are not publically available under Non-Disclosure Agreements. 

Some providers like Standard & Poor’s Global Platts started tracking the market prices of so-called European Guarantees of Origin, the European EACs, in September 2019.

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What is the meaning of unbundled EACs for Offtakers and Developer?

Green Tariff Programs are typically long-term power purchase agreements in which a utility or energy trader is obliged to physically purchase at least the same amount of renewable energy and the corresponding EACs sold to electricity consumers. Green Tariffs are usually contracted by larger corporate clients, especially from Healthcare, Real Estate, and telecommunications.

These long-term agreements were developed in response to the growing renewable electricity demand from large-scale corporate customers. These enable them to purchase renewable electricity (PPA energy) from a specific asset through a long-term utility contract similar to a PPA.

Functioning of Green Tariffs
Green Tariff Scheme
Note: SPV = Special Purpose Vehicle, IPP = Independent Power Producer,
EAC = Energy Attribute Certificate, P2 > P1; P2 > P3; EAC-Prices normally bundled in PPA-Prices

As shown in the graph, the utility or energy trader may purchase the green energy from its own internal renewable power plants or external sources like wind parks or solar farms. In both parts of the upstream value chain, the underlying Utility PPAs also include bundled EACs. In the downstream portion, the EACs are devalued by the utility or trader on behalf of the corporate buyer under a Green Tariff Utility PPA.

Whether the sold physical electricity is green (100% Renewable Energy) or grey (Fossil Fuels are still included) depends on the seller’s operating electricity portfolio or the energy trader. Therefore, utilities are increasingly founding subsidiaries operating renewable energy assets to reliably prove that the delivered electricity is sourced 100% from renewable energy plants.

However, the graph shows that the PPA price invoiced to the offtaker (P2) usually exceeds the prices from upstream PPAs (P1) or internal calculated prices (P3) due to the utility or trader margin.

Global Overview of Unbundled EACs

Green premium programs are contracts between a utility or energy trader and small-scale commercial and industrial customers and residential consumers. These contracts typically have short-term tenors between one to three years.

The offtakers pay a cost premium as an extra line item on their electricity bill rather than paying a fixed PPA price comparable to Green Tariffs. In contrast to Green Tariff Programs, sellers of renewable energy can only purchase unbundled EACs and not necessarily a physical amount of renewable energy.

Thus, the generation mix used to provide the green power can be intermittently changed by the utility. Green Premium Programs incur additional costs to the corporate buyer on top of their prices for physical delivery of electricity. Thus, offtakers are unable to save and fix their cost of electricity over a longer time horizon.

Functioning of Green Premium Tariffs
Green Premium Scheme
Note: SPV = Special Purpose Vehicle, IPP = Independent Power Producer,
EAC = Energy Attribute Certificate, P4 > P1, P2, P3

The utility or energy trader purchases EACs from either secondary ECA markets or Independent Power Producers or even owns renewable energy assets as part of the upstream value chain.

Under Green Premium Programs, the EACs sold to the offtaker are unbundled and devalued by the utility or energy trader since there is no obligation for utilities or energy traders to deliver renewable energy under Green Premium schemes physically. The EAC price (P4) invoiced to the corporate buyer exceeds the upstream portfolio price, defined as the volume-weighted average price of P1, P2, and P3.

The excess amount is added to the invoice and contains the utility or energy trader's margin. In sum, Green Premium products provide only a limited opportunity for corporate buyers to prove their sustainability and manage their electricity costs.