Introduction
In the year 2023, Croatia is taking bold steps towards renewable energy adoption and environmental sustainability.As the country strives to, in line with EU-agreed objectives, reduce carbon emissions and embrace cleaner energy sources leading to enhanced energy security, Power Purchase Agreements (PPAs) have emerged as a vital tool in achieving these ambitions, including recently through cPPAs. This article provides a high-level overview of the state of cPPAs in Croatia, shedding light on their significance, distinctive features, and their role in advancing the country’s commitment to clean energy.
The Imperative for Power Purchase Agreements
Croatia, like many countries globally, grapples with the necessity of transitioning to a sustainable energy future, with more security. Essential objectives include reducing dependency on fossil fuels, bolstering energy security, and combatting climate change. In this context, PPAs have risen as a linchpin in Croatia’s transition towards cleaner energy sources.
PPAs, or contractual agreements, form the backbone of renewable energy procurement in Croatia. These agreements establish a contractual relationship between renewable energy producers, frequently solar or wind farms, and a diverse range of buyers, including electricity retailers, corporations, and government agencies. PPAs delineate the terms and conditions of electricity purchase from renewable sources over an extended period. There are two primary categories:
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- cPPAs: Involving non-governmental entities such as utilities, corporations, or power traders, these agreements focus on procuring power output for commercial purposes.
- Publicly subsidised PPAs: Initiated by government entities, these agreements often include competitive contract-for-difference (CfD) or administratively set Feed-in Tariffs (FITs).
With public PPAs and feed-in tariffs (FIT) and feed-in premiums (FIP) being gradually phased out, cPPAs emerge as a noteworthy subset within the realm of PPAs. cPPAs, in essence, are a specialized form of PPAs, tailored to the needs of large corporations. They have gained immense popularity globally and offer corporations the opportunity to procure renewable energy directly from producers over a duration of 5 to 10 years, often at a fixed price. CPPAs have become a linchpin for businesses and renewable energy developers aiming to collaborate in fulfilling sustainability goals (through e.g. guarantees of origin, carbon credits or other arrangements). It is essential to note that the legal intricacies of cPPAs are intricate and necessitate careful consideration.
The Rising Significance of cPPAs in Ensuring Energy Security
As electricity prices have had their upward trajectory and uncertainties loom over future costs, the pursuit of energy from dependable sources has assumed the status of a national security imperative. Croatia is no exception, recognizing the value of securing clean and readily available renewable energy directly from producers.
cPPAs, particularly those characterized by fixed pricing over an extended decade, offer a stable and predictable energy supply for both producers and buyers. This stability acts as a safeguard against market volatility and price hikes, ensuring steadfast access to clean energy.
Why Opt for a cPPA?
Businesses opt for cPPAs for a multitude of reasons. For large energy customers, cPPAs offer a lifeline of price stability, simplifying annual cost planning. Other corporations purchase green energy through cPPAs to align with environmental, social, and governance (ESG) goals, while some leverage these agreements for energy resale and market positioning. Grid operators also find value in cPPAs, using them to offset energy losses. These diverse applications underscore the flexibility and adaptability of cPPAs.
Two Primary cPPA Types – Physical and Virtual
Physical cPPAs involve the direct delivery of electricity from producers to buyers through intermediary entities, incurring additional transmission costs. In contrast, virtual cPPAs do not involve the physical transfer of energy; instead, all energy is transacted on the market, with compensation mechanisms in place to address market price fluctuations.
Cross-border cPPAs may be also an option, allowing, for instance, a Croatian power plant to sign a long-term energy supply contract with a buyer in neighboring countries like Slovenia or Hungary, HUPEX being the reference market for the SEE region. Nevertheless, such agreements come with inherent risks stemming from cross-border price variations and varying regulatory frameworks.
cPPA Worldwide
While cPPAs have firmly established their presence in the United States, Asia, Spain, the United Kingdom, and Scandinavia, they are gradually gaining traction across Europe and the rest of the world. Notably, global corporations procured a record-breaking 23.7 GW of clean energy through cPPAs between 2010 and 2020. Although demand dipped in 2022 due to market disruptions, long-term trends indicate a sustained corporate interest in clean energy procurement, unaffected by short-term market fluctuations.
cPPAs in Europe
Spain leads in contracted megawatts through cPPAs, with 24% of all PPAs signed in the first half of 2022. Following Spain are countries like the United Kingdom, Denmark, Finland, Sweden, and Germany, showcasing the geographical diversity of cPPAs within Europe.
Recent Developments in Croatia
A substantial stride towards sustainability has been made in Croatia, exemplified by the collaboration between the country’s leading telecom company, Hrvatski Telekom (member of Deutsche Telekom Group), and Professio Energia, a listed entity backed by leading insurance and banking players in Croatia and the region. They have entered into an ice-breaking virtual cPPA securing an annual supply of 50 GWh of renewable energy from a forthcoming wind farm in the Mazin Gračac region. The word in the market in Croatia is that there are other producers considering similar arrangements to accelerate the green transition and create additional value.
Key Considerations
The crafting of a cPPA necessitates deliberate contemplation of various elements to ensure the formulation of a mutually advantageous and legally sound agreement, the key considerations being (some of which will be influenced also by the financing parties):
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- Terms and Conditions: cPPAs are inherently flexible and can encompass a spectrum of terms and conditions, inter alia, the quantity and price of electricity, balancing arrangements, the agreement’s duration, the geographical location of the renewable energy project, and the consequences for breaches of contract.
- Regulatory Compliance: Depending on the jurisdiction in which a cPPA is executed, specific regulations may dictate the terms of these agreements. For instance, the EU-level price cap had significant impact which needed to be taken into account from a commercial standpoint.
- Environmental and Sustainability Standards: cPPAs often find their roots in environmental and sustainability objectives. Consequently, these agreements may incorporate provisions concerning the source and environmental attributes of the procured energy (e.g. GOOs, carbon credits). Adherence to renewable energy and emissions reduction standards may also emerge as a pivotal component.
- Dispute Resolution: To facilitate the amicable resolution of disputes, cPPAs routinely incorporate mechanisms like arbitration or mediation clauses. These clauses meticulously delineate the processes involved in resolving disagreements, thus averting potentially protracted and costly litigation, while engaging experts who know the energy sector.
- Force Majeure and Termination: cPPAs are typically equipped with force majeure clauses designed to address unforeseen events—such as natural disasters or regulatory alterations—that could conceivably affect the contract’s execution. These clauses also outline the conditions under which either party can initiate the termination of the agreement.
- Liability and Indemnification: In the event of non-performance or other issues, cPPAs allocate liabilities and responsibilities. These agreements may also incorporate indemnification clauses, whereby one party agrees to compensate the other for specified losses or damages (including take-or-pay obligations in some instances).
- Insurance Requirements: Parties might be contractually obliged to uphold certain categories of insurance coverage, such as liability or project performance insurance. These provisions serve as risk mitigation measures associated with cPPAs. This also depends on the region, e.g. SEE region is quite exposed to lightning strike.
- Governing Law: These agreements ordinarily specify the governing law in the event of disputes. Additionally, they may encompass choice-of-forum clauses that determine the jurisdiction where legal actions will be adjudicated.
- Assignment and Transfer: cPPAs may contain provisions addressing the potential for parties to assign or transfer their rights and obligations under the agreement to third parties, but with certain carve-outs regarding affiliated entities.
- Renewable Energy Credits (RECs): In cases where cPPAs encompass the purchase of Renewable Energy Credits (RECs), they should outline the terms and conditions governing the creation, ownership, and transfer of these credits, but having in mind the validity period of such credits.
Conclusion
cPPAs hold tremendous promise in advancing sustainability and promoting collaboration between corporations and renewable energy producers. The successful negotiation of cPPAs necessitates the engagement of legal counsel well-versed in energy and contract law. Compliance with local regulations and an astute understanding of energy market dynamics are indispensable. By diligently addressing these legal considerations, corporations and project developers can collectively pave the path towards a greener, more sustainable future, not just in Croatia but on a global scale. cPPAs represent a testament to the power of collaboration in the simultaneous pursuit of environmental and corporate objectives. However, the legislative framework will need to be agile and support the development of cPPA arrangements and the green transition in an timely and adequate manner on this journey.