Incorporating SMEs into PPAs, CO2-decoupled prices and better infrastructure: the recipe to guarantee European industrial competitiveness

In a context of energy transition, economic uncertainty and volatility, the competitiveness of European industry has been placed at the center of the debate. The situation is marked by rising energy prices and companies that are faced with the obligation to reduce greenhouse gas emissions. In this scenario, experts opt for Power Purchase Agreements (PPA), a type of long-term contract established between companies and renewable energy suppliers that ensure stable and predictable prices, in addition to promoting the environmental sustainability of the industry.

An analysis presented in September by Mario Draghi—the already popular Draghi Report— assures that companies in the Old Continent pay up to three times more for electricity than their competitors in the United States and up to five times more for gas. This situation, aggravated by the energy crisis after the invasion of Ukraine, is hampering the competitiveness of European companies against powers such as China and the US. The text, whose official title is The Future of European Competitivenessfocuses on energy-intensive sectors such as steel and automotive, although it can be extended to other industries. Precisely, it is in this scenario where more and more voices are emerging that call for betting on PPAs as an essential tool.

The examples are numerous. From the energy management portal Statkraft It is argued that “PPAs are the key for the industry to plan its long-term investments”, since not having to worry about the volatility of energy prices gives “a competitive advantage”, even more so at a time when Predictability is a particularly valued asset. In parallel, there are added benefits because PPAs represent an opportunity for companies to improve their corporate image in a framework in which consumers and investors are increasingly sensitive to reducing their carbon footprint. A recent study by Telefónica points out that companies that lead the energy transition not only improve their reputation, thus obtaining a significant competitive advantage.

This alignment with sustainability objectives is key not only for image, but also for long-term viability. In this sense, ENGIE also defends that “companies that adopt PPA not only improve their sustainability, but also ensure their continuity in a market that is increasingly demanding in terms of environmental regulation.” In parallel, “these agreements promote the development of new renewable energy projects, creating a virtuous circle that accelerates the energy transition,” the energy group says.

Obstacles related to SMEs, prices and infrastructure

So far, the United States has led the implementation of PPA. In fact, large technology companies such as Google and Microsoft have adopted these agreements, ensuring their long-term energy supply while reducing their carbon footprint. Although this approach has proven to be effective in stabilizing energy costs, the big difference with respect to the North American country is that Europe does not have abundant natural resources.

Despite everything, PPAs are gaining ground. According to another analysis, in this case from S&P Global Commodity Insights, “the year 2024 is on track for a record for PPAs in Europe, after buyers obtained 30 TWh/year in the first six months of the year.” But these data focus on large companies, while formulas that allow SMEs to access this type of agreements do not proliferate due to lack of resources. To solve this problem, Draghi proposes the creation of market platforms that aggregate the demand of these small and medium-sized companies.

But there are more obstacles. In the EU, electricity prices continue to be linked to fossil fuels, meaning that although a significant portion of energy comes from renewable sources, the price is still impacted by fluctuations in the gas market. Again, according to the European Competitiveness Report, this limits the potential of PPAs to offer truly competitive prices. In this sense, experts advocate for a decoupling of the prices of renewable energy and fossil fuels, thus reducing volatility, offering greater predictability to companies and advancing the energy transition.

The last challenge is infrastructure and the Draghi Report’s recipe is for “Europe to invest in its modernization because the continent’s electrical networks are not prepared to manage the volume of renewable energy that is expected in the coming years.” Along the same lines, a study by the consulting firm Deloitte confirms that “it is necessary to improve interconnection between member states and expedite permits for the construction of new renewable facilities.” Without adequate infrastructure, European companies will continue to face numerous difficulties, but if the EU is able to modernize it, adopt the PPA model taking into account SMEs and decouple the prices of renewable energy from fossil fuels, will be better positioned on the international stage.