An ever-changing market: Delving into the heart of power purchase agreements

<p class="p1"><span class="s1">Cross-border VPPAs expose corporates to Basis Risk, causing settlement price gaps and weakening confidence in these hedging tools, contributing to a 35% drop in European PPA signings in 2025 amid complex market conditions. The market is shifting toward more structured, domestic, and hybrid PPAs, supported by BESS and modern IPPs, to better manage risk and realign buyers, sellers, and lenders.</span></p><p>The so-called Basis Risk associated with cross-border virtual power purchase agreements (VPPAs) was explained by Finergreen in March 2024, when many corporate offtakers were reported signing such agreements to hedge their pan-European electricity consumptions, and to decarbonize their energy mix.</p>
<p>For example: a corporate offtaker may enter a cross-border VPPA in Spain to hedge its pan-European consumption, which may be spread across France, Germany, Poland, Italy, Romania, The Netherlands, Belgium, and potentially Spain itself.</p>
<p>At first glance, the main advantage of cross-border VPPAs lies in the ability to limit resources allocated by negotiating one single offtake agreement, rather than entering separate PPAs in each operating market. This can be achieved without altering existing physical power supply agreements. In addition, because cross-border VPPAs include Guarantees of Origin (GOs), they contribute to meeting decarbonization targets while (proxy-)hedging energy costs. More recently, we have observed that certain corporate offtakers have raised concerns shortly after the start of PPA delivery. The key question has been: “Why does the invoicing (final settlement) not match our expectations?”</p>
<p>This situation often occurs because some corporate offtakers may not be fully aware of the risks inherent in this type of structure, particularly the Basis Risk. Consequently, when PPA delivery begins and the first invoices are issued, they may suddenly realize that the effective price does not match the fixed PPA price originally agreed. It is important to remember that cross-border VPPAs are financial hedging instruments structured as Contracts for Difference (CfDs). A key feature is that the fixed PPA price is not directly linked to the spot power price in the markets where the corporate operates. This difference is what defines the Basis Risk. The chart below illustrates the cross-border VPPA structure and the associated price dynamics:</p>
<p><img alt="" class="size-full wp-image-333215 aligncenter" height="445" src="https://www.pv-magazine.com/wp-content/uploads/2026/02/diagram-1.png" tabindex="0" width="595" /></p>
<p>Cross-border VPPAs play as a “proxy” hedging tool, meaning they do not fully hedge 100% of the price risk associated with energy consumption. This is due to the presence of the volume risk (most of such VPPA being under Pay-As-Produced) and the Basis Risk, whereby, at time of settlement (i.e. invoicing), the physical price paid by the corporate for its actual (physical) power consumption may differ from the financial index used to settle the cross-border VPPA.</p>
<p>As these PPAs expose corporate consumers to Basis Risk, confidence in their effectiveness as decarbonization and hedging instruments is beginning to erode. This trend is particularly evident among companies without dedicated energy management teams, which are often unprepared to manage the complexities associated with Basis Risk. This certainly affected the PPA market, negatively impacting the number of deals closed.</p>
<p>In 2025 the number of PPAs signed declined by approximately 35% compared with the previous year in Europe. The market recorded sharp reversal after years of steady annual growth (c. 65% CAGR between 2022 and 2024) although there is a notable increase in BESS deals.</p>
<p><img alt="" class="size-full wp-image-333216 aligncenter" height="385" src="https://www.pv-magazine.com/wp-content/uploads/2026/02/diagram-2.png" tabindex="0" width="558" /></p>
<p>This trend is unfolding amid an increasingly complex market environment, shaped by factors such as the emergence of negative electricity prices across Europe, generally low (though volatile) energy prices, and broader industrial and geopolitical uncertainty. Collectively, these dynamics are contributing to longer, more complex, and more demanding PPA negotiations.</p>
<p><strong>How is this affecting the negotiations?</strong></p>
<p>At Finergreen, we think that current market conditions are excessively affecting the PPA market, which may need a different approach, heading more toward a long-term view. In general, corporate offtakers show greater interest in PPAs when prices are high and volatile, as the Net Present Value (NPV) is more attractive and the PPA provides long-term stability and visibility, even with higher PPA prices.</p>
<p>On the opposite we clearly notice a lack of interest from corporate offtakers for PPAs when energy prices are low and stable (as it has been the case lately). Negative NPVs in such market configuration are, by definition, more difficult to get approved internally, even with lower PPA prices.</p>
<p>But, isn’t this a paradox?</p>
<p>PPA prices are set by a mix of several components, including:</p>
<ul>
<li>Associated risks (such as volume, duration, profile, balancing, credit or basis risks);</li>
<li>Spot and forward market price dynamics, as reflected in prices traded on platforms and exchanges;</li>
<li>The Levelized Cost of Electricity (LCOE) of each technology, including capital, operational and development expenditures, interconnection costs, and other relevant factors (see the illustrative chart below for an example of a solar PV project).</li>
</ul>
<p><img alt="" class="size-full wp-image-333222 aligncenter" height="463" src="https://www.pv-magazine.com/wp-content/uploads/2026/02/diagram-3.png" tabindex="0" width="492" /></p>
<p>While the main objective (price fixing and long-term hedging) remains the same for both buyers and sellers, it is important to note that</p>
<ul>
<li>For corporate offtakers, PPAs represent an opportunity to lock in competitive long-term prices (generally compared with spot market prices) while advancing broader decarbonization strategies.</li>
<li>For renewable developers, PPAs serve as a key tool to secure long-term revenue, support debt financing, and enable the development of new renewable capacity, based on development and financing costs prevailing at a specific point in time.</li>
</ul>
<p>When it comes to the contracts themselves, corporate offtakers should recognize that unbalanced or overly complex negotiations are not conducive to a long-term partnership. Certain clauses, (such as those related to settlement during negative price hours, force majeure, or termination events) can hinder financing conditions and ultimately undermine the competitiveness of the projects.</p>
<p>Even in a rapidly evolving environment, buyers and sellers still share substantial common ground &#8211; enough to meet buyers’ decarbonization and hedging needs while also aligning with sellers’ and lenders’ expectations for stable investment returns.</p>
<p><strong>So, what’s next?</strong></p>
<p>Aware of the need to adapt to corporate offtakers’ requirements, an increasing number of Independent Power Producers (IPPs) are moving towards more structured PPA solutions that better address their needs.</p>
<p>This approach encompasses fixed-shape solutions—such as fixed profiles or monthly and yearly baseload products—as well as hybrid offerings that combine technologies like solar, wind, battery storage, hydro or biomass. As a result, corporates can access more reliable and comprehensive PPAs that allow them to manage both price and volume risks, ensuring the PPA fulfils its purpose of securing energy costs while supporting decarbonization.</p>
<p>To achieve this, renewable developers are already transitioning towards what are often called “next-generation IPPs” or “modern Utilities”, assuming greater risk through sophisticated energy management and commercialization strategies, supported by diversified portfolios. Battery Energy Storage Systems (BESS) will play a key role in this process, unlocking new structuring opportunities for renewable developers, and helping them navigate challenging market conditions.</p>
<p>We are witnessing a turning point in the PPA market, which will enable a resumption of activity. In this context originators and structurers have significant work ahead, including identifying the right opportunities, dedicating time to the structuring of new PPAs, clearly explaining these products, and better communicating their benefits to both counterparties.</p>
<p>Regarding cross-border VPPAs, there will probably always be specific situations in which market correlation, limited project availability, the ability to manage Basis Risk, and other factors may justify an informed decision to pursue this type of deal.</p>
<p>Still the shift is already underway, with corporate buyers increasingly prioritizing physical and domestic PPA solutions, and seeking alternatives to pay-as-produced profiles in order to simplify accounting and operational management of those contracts.</p>
<p><strong>Conclusion</strong></p>
<p>The PPA market has engaged into a transition phase, where general misalignment between sellers and buyers is slowing the installation of new renewable capacity in Europe.</p>
<p>Situation will be unlocked through a better understanding from both buyers and sellers of the different types of risks and how to manage them. This evolution is already reflected in the creation of dedicated energy management teams. Favourable regulation aligned with National Energy & Climate Plans (NECPs) is also key. Finally, lenders involved in project financing will need to become more familiar and comfortable with new PPA structures in order to offer competitive financing conditions.</p>
<p>As market trends continue to evolve, the Finergreen Offtake Advisory team is well placed to help developers and IPPs design forward-thinking, bankable products that combine commercial competitiveness with disciplined risk control.</p>
<p><em>Authors: Yohann Guichard (Managing Partner Offtake Advisory) and Javier García Allué (Offtake Advisory Lead) at Finergreen</em></p>
<p><em>Finergreen is a boutique investment bank dedicated to the energy transition. Founded in 2013, the company has already completed more than 250 transactions. With 100+ people based in a strong network of offices all over the world, the company provides Mergers & Acquisitions, Project Finance, Corporate Finance, and Offtake Advisory services.</em></p>
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