The European Union’s long-planned transition to clean technologies and relative stability in electricity prices — developed over more than 20 years — was disrupted in the winter of 2021. Low wind power generation, increased electricity demand for heating due to cold weather conditions, and Russia’s reduction of natural gas supply caused electricity prices to rise to record levels. Subsequently, the outbreak of the Russia–Ukraine war increased risks related to energy security, forcing the European Union toward a faster “green transition”.
In response, the European Commission placed consumer welfare at the center of its proposed electricity market design reforms presented on March 14, aiming to accelerate the clean energy transition. Rising electricity prices, along with increased price volatility and uncertainty, had become a serious concern for EU citizens. Moreover, high electricity prices posed a significant threat to the commercial competitiveness of all electricity-consuming sectors, particularly industry. The EU has set a binding target to increase the share of renewable energy in the overall energy mix to at least 42.5% by 2030 and is encouraging further growth in renewable electricity generation through market reforms.
One of the key solutions proposed within this reform framework is the use of long-term contracts — such as Renewable Energy Power Purchase Agreements (PPAs) — to enable European consumers and companies to become less dependent on short-term electricity market price fluctuations. These agreements are also expected to accelerate new renewable energy investments. In addition, the European Commission considers structuring investment support primarily through Two-way Contracts for Difference (CfDs) to be a healthier approach under current conditions.
Renewable Energy Power Purchase Agreements (PPAs) are commercial contracts signed between an electricity consumer and an electricity producer, in which the producer agrees to sell electricity to the consumer at a predetermined price. In contrast, Two-way Contracts for Difference are agreements signed between an electricity producer and a public authority (the state), where the strike price is typically determined through a competitive tender process. The producer sells electricity on the market and subsequently settles the difference between the market price and the strike price with the public authority. This mechanism ensures stable revenue for producers while also limiting revenues during periods of high market prices. If the market price falls below the strike price, the producer receives the difference; if the market price exceeds the strike price, the producer pays back the difference.
So, what types of improvements are needed in Türkiye’s electricity market design and broader conditions to enable the development of Renewable Energy PPAs? In other words, in what types of markets can PPAs be implemented and successfully developed?
Investor Confidence
PPAs require significant investments to build and operate renewable energy projects. Investor confidence is essential to attract capital from corporate investors, banks, and other stakeholders. This can be achieved through stable and predictable regulatory frameworks, transparent pricing mechanisms, and clear market signals that encourage investment in renewable energy projects. Strong investor confidence increases demand for such investments and helps reduce financing costs.
Market Transparency
Transparency in energy markets enables more accurate price discovery, which is essential for effective PPA negotiations, and promotes competition. This leads to more efficient pricing and improved market liquidity. Both buyers and sellers need access to transparent market data to assess PPA terms, market trends, and price forecasts. Market transparency supports effective risk management by allowing parties to identify and mitigate risks related to price volatility and counterparty risk, enabling informed investment decisions.
Regulatory Support and Stability
Long-term PPAs require stable regulatory systems that provide certainty and predictability for market participants. Regulations should support the use of long-term PPAs and establish a clear and stable legal framework for their implementation. This includes ensuring that PPAs are legally enforceable and that the rights and obligations of all parties are clearly defined. Investors need clear, consistent, and stable policy frameworks to make informed decisions, reduce risks, and ensure long-term profitability. PPAs rely on long-term revenue streams to provide stable and predictable returns, and regulatory stability ensures confidence that contractual terms will be upheld throughout the agreement period.
Price Signals
Electricity markets must provide clear and accurate price signals that reflect the real costs of electricity generation, transmission, and distribution. This includes transparent pricing mechanisms that accurately reflect electricity costs across different times of day and locations.
Market Competition
Electricity markets should be open to competition, with multiple suppliers and buyers competing to deliver the best value for consumers. This ensures fair and transparent pricing and encourages innovation in products, services, and business models.
Contract Enforceability
PPAs must be legally enforceable, and both parties must trust that contractual obligations can be upheld. This requires clear dispute resolution mechanisms and access to legal remedies in case of contract breaches. Beyond contract drafting and legal frameworks, the practical effectiveness, speed, and reliability of the judicial system are decisive factors in enforceability.
Grid Infrastructure
A robust and flexible grid infrastructure is critical to maintaining system stability. Renewable energy projects tend to be decentralized, requiring strong transmission and distribution networks to ensure efficient and uninterrupted electricity delivery. Grid infrastructure also plays a key role in balancing supply and demand, including sufficient transmission capacity, distribution capacity, storage solutions, and advanced grid management systems to integrate diverse renewable energy sources.
Capacity Planning
Electricity markets must have effective long-term capacity planning mechanisms to ensure adequate supply. This includes sufficient generation, transmission, distribution, and storage capacity to manage fluctuations in supply and demand. A model can be developed whereby a portion of new renewable capacity is built based on long-term PPAs, supported by appropriate regulations.
Data Management
Effective data management is essential for the efficient functioning of long-term PPAs. This includes accurate monitoring of electricity production and consumption, management of contractual obligations, and tracking of key performance indicators. Digitalization and smart systems are necessary.
Creditworthiness
Both parties to a PPA must have sufficient creditworthiness to fulfill contractual obligations. This includes strong financial standing, proven performance history, and low default risk. Corporate creditworthiness is also influenced by national economic stability, as high macroeconomic volatility makes it more difficult for companies to manage long-term commercial commitments.
Risk Management
Effective risk management strategies are required for long-term PPAs, covering operational, financial, and market-related risks. Insurance products can help mitigate counterparty, political, and project-related risks. In an environment where country risks and uncertainties are rising, both the likelihood of risk realization and the difficulty of managing PPA-related risks increase.
Financing
The availability of green funds and financial institutions experienced in PPA mechanisms is crucial. Lenders should be involved in the contractual process from the outset, as the contractual structure of the PPA forms the basis for financing arrangements. Clearly defined contract terms — such as duration, pricing mechanisms, and risk allocation — are essential. Low country risk and high stability significantly improve financing attractiveness and feasibility.
Climate Policies
Climate policies that promote the transition to renewable energy play an important role in the success of long-term PPAs. These include renewable energy targets, carbon pricing mechanisms, and incentive schemes for renewable projects.
Cooperation and Stakeholder Engagement
Successful long-term PPAs typically require collaborative partnerships among buyers, sellers, financial institutions, and other electricity market stakeholders. Developing multi-stakeholder market mechanisms that enable bilateral electricity trading through PPAs can accelerate renewable energy investments by strengthening ecosystem interaction.
Technological Innovation
Technological innovation can reduce renewable energy production costs and improve PPA efficiency. This includes advancements in energy storage, demand-side participation, and smart grid technologies.
Each of the points outlined above deserves deeper and more detailed discussion — perhaps in future articles. The European Commission has presented its proposals for reforming the EU electricity market design. So what should Türkiye’s proposals be for reforming its own electricity market design?
There is much that can be done, including the development of PPAs. However, Türkiye must first address broader systemic challenges — such as economic instability, weaknesses in the legal system, and elevated country risk — which directly affect most of the criteria discussed above. That said, I believe Türkiye’s energy sector players and stakeholders are ready for PPAs.
