The European Union aims to have renewable energy account for 55% of energy use by 2030. To meet this goal, governments will need to provide financial incentives that encourage power generators to switch to clean energy production. Companies that need energy the most face extreme price volatility in power markets, whereas energy producers struggle to find finance to build and operate their renewable energy assets.

What if governments lack the resources to provide the necessary financial incentives to guarantee investments in renewable energy projects? How can the financial sector invest in such projects without securities? Energy producers and buyers can use commercial power purchase agreements to secure the energy supply and prices for a fixed period, thereby fostering more clean energy production.

In a commercial power purchase agreement, a producer of renewable energy signs a contract with an energy buyer, such as a utility company, power trader or corporation. The two sides sign a deal to buy and sell a given amount of renewable energy for a fixed price over a long-term period. The renewable energy generator will use this agreement to obtain financing to build and operate the facilities, such as solar or wind farms, or hydroelectric dams. Once the renewable energy assets are running, the buyer will start receiving and paying for the energy, benefiting from the fixed price signed earlier. This helps ensure that the lender gets repaid and that the energy producer has a long-term buyer of green energy.

Commercial power purchase agreements are starting to rise in popularity, mainly for large businesses looking to meet new demands for renewable energy. It is estimated that by 2030, up to 20% of wind and solar projects could benefit from long-term commercial power purchase agreements. Such contracts can make a big contribution to national and European renewable energy targets.

Nevertheless, financial institutions and other investors can be reluctant to sign long-term contracts with the less-established small and medium companies. These companies can present a higher credit risk than larger companies. To help address this challenge, the European Commission’s Directorate-General for Energy asked the European Investment Advisory Hub to explore the development of financial instruments that would increase the use of commercial power purchase agreements and offer incentives for more renewable energy production in the European Union.

EIB experts and external consultants analysed the current situation and future evolution of the sector in Europe, including an assessment of potential financial instruments and non-financial solutions. The proposed instruments may help investors, financial and public institutions, and companies of all sizes work together to provide stable prices and cost-effective renewable energy. Pilot initiatives are now being developed.