Changed Trading Behaviour in Long Term Power Trading

The majority of power generated and consumed in Norway is traded at the power exchange Nord Pool. Typical options for hedging against price developments are available at Nasdaq OMX through financial market price contracts and EPADs. However, recently there has been a growing trend towards increased use of bilateral agreements, so-called Power Purchase Agreements (PPAs), both in the Nordics and in the rest of Europe.

A PPA is a direct bilateral agreement between a supplier and a consumer of power. Conducting bilateral power purchase agreements is not as such a new development. Traditional PPAs have been used by producers and consumers to trade electricity for many years. In recent years, new buyers and sellers have entered the market for PPAs.

In our study, we assess what this growing trend has been driven by, what the differences between PPAs and more traditional hedging options are, and whether the growing trend in PPAs has affected the use of these more traditional hedging options.

The main conclusions of our study are: 

• Recent development in use of PPAs is driven mainly by wind and solar farms on the seller side and global corporates such as data centres on the buyer side.
• PPAs are more flexible than the financial future market and are not subject to the same financial regulation. However, the lack of financial regulation also implies a larger counterparty risk.
• PPAs are a complementing hedging option to the financial future market and are used in long term hedging of more than 5+ years.

The study is commissioned by The Norwegian Energy Regulatory Authority (NVE-RME).