Power purchase agreements for net zero – Malta’s Green Horizon?

Decarbonisation for developing countries and emerging markets is a tough task. Even though a lot of countries are in an advantageous position to produce green energy due to their abundant renewable resources, bridging the climate finance gap to develop renewable energy projects is a huge barrier. One promising solution, not only for developing countries but also for Malta, is to start linking energy ambitions with Power Purchase Agreements (PPA).

A PPA is a contractual arrangement typically between a power producer and a buyer, where the buyer agrees to purchase electricity for a specified period. Such PPAs enable buyers to secure a long-term supply of clean energy at agreed-upon prices and give the producer certainty of revenue. Utilising PPAs can be a useful strategy to fund renewable energy projects. When the government’s budgetary resources are insufficient, Independent Power Producers (IPPs) can be advantageous to draw in private investment since a predictable revenue stream eases access to capital. In that way, developers are not dependent on government rates and can construct additional renewable infrastructure.

PPAs are an increasingly popular tool to help energy users meet sustainability goals. Especially tech companies, such as Amazon and Google, utilise Corporate Power Purchase Agreements (CPPA) for renewable energy in emerging markets to reap pricing benefits. While helping local companies to decarbonize should be seen as preferable, focussing on cross-border virtual and physical CPPAs, can be necessary to fulfil net-zero commitments in the immediate term and reap economic benefits. Virtual PPAs and matching are utilised by companies to offset their carbon footprints by matching the local energy supply of non-renewable electricity with renewable energy abroad which leads to the distribution of renewable energy into the broader electricity grid.

The success of CPPAs depends on the removal of barriers to the use of CPPAs. Such barriers include limited private sector participation, a single buyer requirement, which typically foresees a state-owned entity, restrictive wheeling arrangements, and a lack of a level playing field for the costs of renewable energy. It seems that only if governments and stakeholders create an enabling environment with a liberalized CPPA regime in place, renewable deployment and economic benefits can be achieved.

However, apart from economic and operational considerations of PPAs, human rights risks, particularly of CPPAs, need to be seriously acknowledged. Renewable energy projects can have adverse impacts on land grabs, indigenous communities, and poverty wages. By investing in such projects with PPAs, companies and states contribute directly to such violations. According to the UN Guiding Principles on Business & Human Rights, companies have the responsibility to respect human rights across all their operations, which include their CPPAs. Since large businesses, such as Google or Amazon hold significant purchasing power, they need to ensure compliance and leverage their power to demand greater respect for human rights.

Governments also risk violating their obligation towards respecting, protecting, and fulfilling human rights, when undertaking financial de-risking in investor-state contracts to insure investors. Stabilisation or freeze clauses can have far-reaching negative impacts on the implementation of social and environmental protection.

Furthermore, the monopoly-like position of certain IPPs capturing government and buyers leads to certain power structures, that higher the risk of abuse significantly. Some IPPs make use of tax havens to avoid tax obligations and engage in illegal practices such as corruption, which siphons away tax revenue from developing countries to fulfil their human rights obligations.

To conclude, PPAs can drive decarbonization efforts to help states and companies meet their climate goals. However, it must be safeguarded that they do not do so at the cost of human rights abuses. As for Malta, where PPAs are no foreign concept, the question arises whether the country’s energy policies are geared toward renewable PPAs considering its ambitious offshore renewable energy plans.