The sale of the generated electricity by renewable energy generators through market-based long-term power purchase agreements (PPAs) is a fairly new phenomenon in the Hungarian electricity market. Whilst PPAs have already been concluded between conventional power plants and off-takers in the past, the interest towards renewable PPAs has only started to increase recently, primarily for the following reasons:
Firstly, over the last few years the economics of renewable energy generation has substantially improved, and renewable energy generation has become more and more competitive with conventional forms of power generation.
Secondly, the governments started to gradually phase out many of the formerly existing “old school” renewable subsidy schemes, including the KÁT subsidy scheme in Hungary. Thirdly, the dramatic increase and the volatility of the wholesale electricity prices increased the demand for longer time fixed price electricity sourcing arrangements. Lastly, investing in the green economy, including renewable energy generation, has become a number one agenda item for large energy companies and also for institutional investors.
As a result, in the Hungarian electricity market an increasing number of renewable project developers are looking for the conclusion of long-term renewable PPAs to secure the return of investment of their projects. Depending on the pricing formula, a long-term PPA can provide price certainty for a fixed period and thus protection against the volatility in the electricity prices both for the generator and the off-taker. The predictable and stable revenue stream are essential for the bankability of renewable projects. In addition to the key commercial conditions of the renewable PPAs, the technical and legal aspects should also be carefully considered, since such clauses also have relevance from the bankability perspective.
In Hungary, renewable energy generators which do not participate in the KÁT state-subsidy scheme can sell their generated electricity on the free (competitive) electricity market. The sale of the generated electricity may be carried out either:
- directly on the Hungarian Power Exchange, which is the organized Hungarian power market, or
- through bilateral sales contract concluded with an electricity trader or a customer (usually industrial customer(s)).
As opposed to a standard bilateral sales agreement, a renewable PPA is usually a long-term contract under which an electricity trader or customer agrees to purchase electricity directly from the renewable energy generator. The Hungarian energy regulatory framework does not contain any specific restrictions on the conclusion of PPAs between renewable energy generators and electricity traders as off-takers, which means that the parties are entitled to freely agree the content of their contractual relationship. However, if the renewable energy generator intends to sell electricity directly to customers, it must comply with certain regulatory provisions, but still in this scenario the parties' freedom to determine the commercial content of their contract is relatively broad. Most notably, the pricing under a renewable PPA is liberalised and is based on the free negotiation between the contracting parties without any intervention in the form of regulated product tariffs. Notwithstanding the foregoing, the relevant energy sector specific rules and the industrial codes of the Hungarian electricity system, such as e.g. the Operational Code and the Commercial Code of the Hungarian electricity transmission system operator, MAVIR, also apply to PPAs. In practice this means that the renewable energy generator and the off-taker is entitled to freely agree on the specific terms and conditions of the PPA as long as their agreement does not contradict a specific provision of the aforementioned sector-specific laws.
Having regard to the above, in the coming period we expect that project finance lenders will become more and more comfortable with PPAs and the associated risk factors, and therefore, the number of projects which are financed on the back of PPAs will increase.
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