2. Executive summary

PPAs and their use in the Nordics

Power Purchase Agreements (PPAs) has been and is a key driver behind the renewable energy development in the Nordic region. They are a key tool for making projects bankable and they provide predictability for the needed time horizon for consumers and producers of electricity. As subsidy mechanisms change or disappear, PPAs provide the risk mitigation required to secure financing of new RES projects.

PPAs regulate the sale of electricity between buyers and sellers. They are tailor-made and long-term. The most common price structure consists of fixed price for baseload or pay-as-produced volumes. Utility PPAs and Corporate PPAs are the most common PPA types in the Nordics.

The Nordic PPA market is generally not transparent on contracting terms beyond size, duration and contract parties. The market is considered mature but has experienced a slow-down after the energy crisis. Traditional power-intensive industries offtake over half of PPA volumes in the Nordics, while the share of generation technologies in Nordic PPAs varies between country, but onshore wind represents the highest share overall. The typical tenor of the PPAs trends towards shorter durations.

The key stakeholders in PPAs are RES producers, corporate consumers, utilities or traders, and lenders. Lenders have become increasingly aware of the underlying risks in PPAs, leading to stricter requirements to achieve bankability.

EU's regulatory landscape has been shifting to actively encourage and facilitate the use of PPAs, to achieve climate and energy goals. The Electricity Market Design reform package, and specifically Regulation (EU) 2024/1747 Article 19A, launched a toolbox for promoting PPAs. The toolbox addresses topics like general promotion and barrier removal, PPA market platform assessment, guarantee schemes, PPAs in support schemes and other PPA specifications.

Challenges in Nordic PPA market

An important part of this report has been to identify challenges in the Nordic PPA market. Through a market survey and by monitoring the recent debates, AFRY has mapped the following PPA-specific challenges:

The lack of price transparency in the Nordic market creates challenges in market comparability
Price volatility and forecasting risk create challenges for counter-parties seeking to agree on pricing and regulate underlying market risks
The large number of bidding areas in the Nordics limit the pool of PPA counterparties due to the basis risk
Counterparty risk challenges long term PPAs, and especially if counterparty operates a less mature business model
Differences in preferred PPA durations reduce the pool of suppliers and offtakers with aligned interests
Certain PPA structures may limit flexibility in underlying assets of PPAs
The perceived regulatory risk has increased in recent years, undermining investor confidence
Subsidies for RES may reduce the need for hedging or introduce uncertainty and distort price signals for PPAs
Financial accounting for PPAs is complex due to the uniqueness of electricity as a commodity and market volatility
The discussions around market-based versus location-based scope 2, and the ongoing debate on GOs, create uncertainties
There are generally not any major tax issues specific to PPAs in the Nordics, except resource rent tax limiting the supply of PPAs in Norway
EU’s attempt to promote RES and reach climate targets, has made some regulations complex and challenging for PPAs

Strategies to overcome the challenges

The mapped challenges in the Nordic PPA market are categorized in a framework that both links the challenges to the relevant tools in the EU toolbox, while also defining certain sub-categories, such as:

PPA-specific challenges requiring policy action to mitigate barriers
PPA-specific challenges best addressed through market mechanisms
Systemic issues requiring policy attention to support the PPA market
Systemic issues that should be managed through market mechanisms

The result of this mapping exercise indicates that the EU toolbox addresses most of Nordic PPA challenges where policy attention is needed.

There are some key features of the Nordic PPA market we should consider, when assessing the current challenges:

PPAs are means to an end
The Nordic PPA market has been a success
PPAs come in many shapes and sizes
PPAs may not be suited for all types of offtakers

For all the challenges, AFRY indicates strategic considerations and proposes next steps for policymakers in detail, but as more overarching strategic considerations to approach the challenges in the Nordic PPA market, AFRY highlights:

One size-fits all policies are not suited for the bespoke nature of the PPA market
Predictability in regulatory framework is key for long term commitments
The PPA market should remain voluntarily with freedom to customize terms and allow for innovation
Periodic market imbalances are most effectively solved through market mechanisms