Diving into the core of power purchase agreements – SPE

The so-called basis risk associated with cross-border virtual power purchase agreements (VPPAs) was declared by Finergreen in March 2024, when many corporate buyers reportedly signed such agreements to hedge their pan-European electricity consumption and decarbonize their energy mix.

For example, a business buyer can enter into a cross-border VPPA in Spain to cover its pan-European consumption, which could be spread across France, Germany, Poland, Italy, Romania, the Netherlands, Belgium and possibly Spain itself.

At first glance, the main advantage of cross-border VPPAs lies in the ability to limit allocated resources by negotiating a single offtake agreement, rather than entering into separate PPAs in each operating market. This can be achieved without changing existing physical power supply agreements. Furthermore, because cross-border VPPAs include Guarantees of Origin (GOs), they contribute to achieving decarbonization targets while covering energy costs (proxy). More recently, we have noted that some corporate buyers have raised concerns shortly after the start of implementation of the PPA. The key question was: “Why does the invoicing (final settlement) not match our expectations?”

This situation often arises because some business acquirers may not be fully aware of the risks inherent in these types of structures, especially basis risk. So when PPA delivery begins and the first invoices are issued, they may suddenly realize that the effective price does not match the originally agreed PPA fixed price. It is important to remember that cross-border VPPAs are financial hedging instruments structured as Contracts for Difference (CfDs). An important feature is that the fixed PPA price is not directly linked to the spot electricity price on the markets where the company is active. This difference determines the basis risk. The chart below illustrates the cross-border VPPA structure and associated price dynamics:

Cross-border VPPAs act as a ‘proxy’ hedging instrument, meaning they do not fully hedge 100% of the price risk associated with energy consumption. This is due to the presence of volume risk (most such VPPA fall under Pay-As-Produced) and basis risk, where, at the time of settlement (i.e. billing), the physical price paid by the company for its actual (physical) power consumption may differ from the financial index used to settle the cross-border VPPA.

As these PPAs expose business consumers to basis risk, confidence in their effectiveness as decarbonization and hedging tools is beginning to erode. This trend is especially evident among companies without dedicated energy management teams, who are often unprepared to manage the complexities associated with Basis Risk. This certainly impacted the PPA market and negatively impacted the number of deals closed.

In 2025, the number of signed PPAs in Europe fell by approximately 35% compared to the previous year. The market has seen a sharp turnaround after years of steady annual growth (approx. 65% CAGR between 2022 and 2024), although there has been a notable increase in the number of BESS deals.

This trend is unfolding in an increasingly complex market environment, shaped by factors such as the emergence of negative electricity prices across Europe, generally low (although volatile) energy prices, and broader industrial and geopolitical uncertainty. Collectively, these dynamics contribute to longer, more complex, and more demanding PPA negotiations.

How does this affect the negotiations?

At Finergreen we believe that current market conditions are having an outsized impact on the PPA market, which may require a different approach and move more towards a long-term view. In general, corporate buyers show more interest in PPAs when prices are high and volatile because the net present value (NPV) is more attractive and the PPA offers long-term stability and visibility, even at higher PPA prices.

On the other hand, we clearly see a lack of interest among business buyers for PPAs when energy prices are low and stable (as has been the case recently). Negative NPVs are inherently more difficult to get internally approved in such a market configuration, even with lower PPA prices.

But isn’t this a paradox?

PPA prices are determined by a combination of several components, including:

• Associated risks (such as volume, maturity, profile, balancing, credit or basis risks);
• Price dynamics in the spot and futures markets, as reflected in prices traded on platforms and exchanges;
• The Levelized Cost of Electricity (LCOE) of each technology, including capital, operational and development expenses, interconnection costs and other relevant factors (see the illustrative diagram below for an example of a solar PV project).

While the main objective (price fixing and long-term hedging) remains the same for both buyers and sellers, it is important to note that

• For business buyers, PPAs offer an opportunity to lock in competitive long-term prices (typically compared to spot market prices) while promoting broader decarbonization strategies.
• For renewable energy developers, PPAs serve as an important tool to secure long-term revenues, support debt financing and enable the development of new renewable capacity, based on development and financing costs in effect at a specific point in time.

When it comes to the contracts themselves, business buyers must recognize that unbalanced or overly complex negotiations are not conducive to a long-term partnership. Certain clauses (such as those related to settlement during negative price hours, force majeure or termination events) may hamper financing conditions and ultimately undermine the competitiveness of the projects.

Even in a rapidly evolving environment, buyers and sellers still share substantial common ground – enough to meet buyers’ decarbonization and hedging needs, while also aligning with sellers’ and lenders’ expectations for stable investment returns.

So, what’s next?

Recognizing the need to adapt to the demands of business buyers, an increasing number of independent power producers (IPPs) are moving towards more structured PPA solutions that better meet their needs.

This approach includes fixed-form solutions, such as fixed profiles or monthly and annual baseload products, as well as hybrid offerings that combine technologies such as solar, wind, battery storage, hydropower or biomass. As a result, companies have access to more reliable and comprehensive PPAs that allow them to manage both price and volume risks, ensuring the PPA fulfills its purpose of securing energy costs and supporting decarbonization.

To achieve this, renewable energy developers are already transitioning to what are often called “next generation IPPs” or “modern utilities,” taking on greater risk through advanced energy management and commercialization strategies, supported by diversified portfolios. Battery Energy Storage Systems (BESS) will play a key role in this process, unlocking new structuring opportunities for sustainable developers and helping them navigate challenging market conditions.

We are witnessing a turning point in the PPA market, which will allow a resumption of activities. In this context, originators and structurers have significant work to do, including identifying the right opportunities, spending time structuring new PPAs, clearly explaining these products and better communicating their benefits to both counterparties.

With respect to cross-border VPPAs, there will likely always be specific situations where market correlation, limited project availability, the ability to manage basis risk and other factors may justify an informed decision to pursue these types of deals.

Yet the shift is already underway, with enterprise buyers increasingly prioritizing physical and domestic PPA solutions and seeking alternatives to pay-as-produced profiles to simplify the accounting and operational management of those contracts.

Conclusion

The PPA market has entered a transition phase, where the general misalignment between sellers and buyers is delaying the installation of new renewable capacity in Europe.

The situation will be opened up by a better understanding by both buyers and sellers of the different types of risks and how to manage them. This evolution is already reflected in the creation of dedicated energy management teams. Favorable regulation in line with National Energy and Climate Plans (NECPs) is also crucial. Finally, lenders involved in project financing will need to become more familiar and comfortable with the new PPA structures to provide competitive financing terms.

As market trends continue to evolve, the Finergreen Offtake Advisory team is well-positioned to help developers and IPPs design progressive, affordable products that combine commercial competitiveness with disciplined risk management.

Authors: Yohann Guichard (Managing Partner Offtake Advisory) and Javier García Allué (Offtake Advisory Lead) at Finergreen

Finergreen is a boutique investment bank focused on the energy transition. The company was founded in 2013 and has completed more than 250 transactions. With more than 100 people based in a strong network of offices around the world, the company offers services in mergers and acquisitions, project finance, corporate finance and offtake advisory.

Popular content