In Southeast Europe, a €70/MWh price in a renewable power purchase agreement does not, on its own, show how much revenue risk a project has transferred. Two agreements at the same nominal price can result in materially different cash flows. Their economic effect depends on the contract structure.
Contract structure determines exposure
A pay-as-produced PPA typically settles electricity based on the plant’s actual generation. While it can remove substantial market-price risk, the agreement must also set out how it handles curtailment, negative prices, imbalances and volumes that cannot be delivered. A baseload PPA creates a different exposure because the generator may commit to supplying a relatively constant volume regardless of renewable output.
If generation falls below the baseload commitment, the producer may have to buy replacement electricity on the market. The price risk has not disappeared; it has changed form. Shaped and fixed-volume agreements add further variations, while floors and caps can offer partial protection while retaining upside.
Some contracts also combine merchant pricing with guaranteed minimum revenues. AleaSoft notes that a PPA’s contribution to project stability depends on the agreed price, contracted volume, delivery profile, duration and obligations assumed by each party. Lenders need to translate those obligations into their cash-flow consequences.
Negative prices and curtailment
Provisions for negative prices are becoming particularly important. A contract may suspend payments if wholesale prices stay negative for a specified period, continue paying the generator, or require the producer to stop generation. Each option creates a different exposure, even when the headline PPA price is the same.
Curtailment terms also matter when the transmission system operator restricts production. The agreement needs to establish whether the buyer pays for deemed generation and whether compensation covers only certain types of curtailment. It must also clarify who bears the risk when the plant is technically available but unable to export.
These terms can determine whether a project retains the capacity to service debt during periods of grid stress. Balancing responsibility is another source of significant variation. A generator that remains financially responsible for differences between forecast and delivered output may face substantial imbalance costs, while a contract that assigns this exposure to the buyer or an aggregator has a fundamentally different economic value.
Credit support and contract expiry
Counterparty credit should be assessed separately from protection against electricity-market risks. A 15-year contract is useful only if the buyer can continue to meet its obligations. Lenders therefore need to examine guarantees, credit support, termination rights and replacement mechanisms alongside the power price.
Termination compensation warrants particular scrutiny. If the buyer defaults halfway through the financing period, lenders need to know whether they would receive enough protection to refinance the project or replace the offtaker. Weak termination terms can leave a supposedly contracted project exposed to merchant-market prices when the original PPA fails.
Merchant tail risk presents a different challenge. A ten-year PPA supporting a project with a 15- or 18-year debt life leaves part of the loan exposed to market prices after the contract expires. Even if the debt matures before the PPA ends, the asset’s residual value may depend on assumptions about the post-contract period.
Assessing PPA bankability
PPA bankability should therefore be assessed as a matrix, not a single figure. The key questions are: What volume is protected, and during which hours? Which market risks are covered, and who pays for imbalances? Who bears curtailment, and what happens during negative prices? What happens if the buyer fails, and how much merchant exposure remains?
A headline price answers none of those questions. As Southeast European markets become more volatile and renewable penetration rises, the commercial engineering of the PPA will increasingly matter as much as the negotiated €/MWh. The strongest contract will not necessarily be the one with the highest quoted price, but the one that continues to protect project cash flow when the electricity system behaves differently from the base case.
