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Understand how heat purchase agreements work

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Heat Purchase Agreements

In an environment marked by rising and volatile energy prices, the climate crisis and the growing need for energy autonomy, manufacturers and urban heat network managers are looking for effective solutions to decarbonize their energy consumption.

This turning point involves a profound transformation of industrial processes and urban heating networks, with the adoption of new technologies, the improvement of energy efficiency and a gradual shift towards renewable energy sources.

However, manufacturers and network operators face a number of obstacles in this process, including a lack of internal resources and skills, the complexity of the projects to be carried out, and the challenges associated with financing these investments. Solutions such as Heat Purchase Agreements (HPAs) are essential to overcoming these challenges. These contracts offer a combination of appropriate financing, innovative technologies and long-term performance guarantees to accelerate decarbonisation. This approach enables industrial companies and district heating networks to reduce their CO2 emissions while maintaining their profitability and competitiveness, thereby meeting both regulatory requirements and market expectations.

While Power Purchase Agreements (PPAs) have been appearing in the electricity sector for some years now, HPAs have long been used in the heat supply sector. Under this model, Newheat designs, finances, builds and operates the plant, and the customer buys the renewable heat produced at a competitive price for a defined period. This is also known as the Heat-as-a-Service (Haas) business model. This approach ensures the supply of low-carbon heat without any initial investment for the customer, who benefits from visibility over energy costs, guaranteed performance over the duration of the contract, and operation and maintenance provided by our team.

The main elements of an HPA and the added value of Newheat

Le Heat Purchase Agreement (HPA) est un contrat à long terme entre deux parties : un client (un site industriel ou un réseau de chaleur) et un fournisseur de chaleur renouvelable (Newheat).
The supplier designs, finances, builds, and operates a dedicated heat production plant. This installation can take various forms: fields of solar thermal collectors, heat pumps, waste heat recovery units, geothermal energy, or a combination of these solutions. The customer, for its part, undertakes to purchase the heat produced for a defined period of up to 30 years.
The price of the heat is fixed contractually, giving customers visibility over their energy costs. The HPA model allows customers to concentrate on their core business while accessing low-carbon, competitive energy, with no initial investment required.
In addition, the supplier takes charge of the maintenance, control and performance optimisation of the installation, guaranteeing a continuous and efficient supply of heat. The customer therefore benefits from a complete service, from production to heat delivery, with no operational or financial risk associated with the infrastructure.

Here are the main components that Newheat includes in its HPA Contracts:

Step 1: Definition of the volume of heat delivered

Each project is developed jointly with the customer. Right from the study phase, Newheat supports its customers by identifying, quantifying and calculating their heating needs, in order to size the most appropriate and competitive solutions.
The contract specifies the volumes of heat to be delivered by the supplier and those to be consumed by the customer.

Step 2 : Contract duration

Contracts are often signed for a defined period of up to 30 years, offering a guarantee of a competitive price over the long term. The duration is set according to the amount of investment, the economic target for the price of heat and the length of commitment desired by the customer. As these installations are very capital-intensive, the longer the term of the contract, the more Newheat’s investment can be amortised, and therefore the more competitive the heat price offered.

Step 3 : Mutual commitments

An HPA is based on bilateral commitments. Newheat guarantees the supply of heat according to the volumes defined at step 1 (in MWh or GWh), while the customer undertakes to purchase a minimum volume of heat, according to the “Take or Pay” principle.
Before drafting the contract, we engage in in-depth discussions with our partners to present, challenge and validate together balanced contractual principles and commitments. This phase is crucial to ensure mutual understanding of the expectations and commitments of both parts.
The commitments, clauses and indemnities negotiated when the HPA is signed help to define a clear framework and give the parties visibility for the duration of the contract. This phase is essential for structuring a robust contract, with a good framework for the risks over time, which will reassure the facility’s financial backers.

Step 4 : Pricing conditions

The pricing approach is tailored to each site, with an overall view of the energy bill. In step 1, Newheat combines decarbonisation solutions based on sustainability issues and local constraints, in particular the availability of resources. This enables us to design a competitive solution that is perfectly suited to the site’s energy needs.
Contracts can include a fixed term and/or a variable term, which can be indexed to different indices to take account of changes in costs over time, such as energy and labour costs.
In particular, if the performance guaranteed by Newheat is not achieved, we will cover the cost of using alternative energy by paying a penalty calculated accordingly.

Key players

For each project, Newheat will create a company dedicated to the project (SPV – Special Purprose Vehicle) which will carry and sign the HPA contract directly with the heat consumer and which will guarantee the supply of heat for the entire duration of the contract.

The creation of an SPV primarily meets the requirements of project financing, the financing method adopted by Newheat. It allows the project to be legally isolated within a dedicated entity, which will hold the assets as well as all the contracts required for its construction, financing and operation. This guarantees that the income generated by the project will be directly allocated to reimbursing the financiers.

If we look in more detail at the players involved in the SPV, a number of stakeholders are involved in ensuring the success of the project and the contractualisation of the HPA. In the following paragraphs, we look at the role and specific contribution of each of these players.

The customer (heat consumer)

the customer can be an industry or a district heating network:

It consumes the heat to meet the energy needs of its industrial processes or to supply public buildings and homes with heating and domestic hot water.
It agrees to buy the heat over a set period of time.
It benefits competitive, low-carbon heat, without having to invest in the infrastructure or provide technical management.

Its relationship with the SPV is contractualised through the heat supply contract (HPA).

The heat supplier (Producer and Distributor)

The heat supplier, such as Newheat, is responsible for the entire project, from design to operation.
The various roles of the heat supplier are embodied in different contracts signed between Newheat and the SPV:

The EPC contract: under this contract, Newheat undertakes to the SPV to design and build the turnkey plant.
Financing: Newheat is the project sponsor and invests as a majority shareholder in the SPV.
The operation and maintenance contract: under this contract, Newheat will maintain the plant for the SPV and optimise production and delivery to ensure a reliable, high-performance heat supply over the long term.

Financial partners

In addition to its equity investment in the project, Newheat raises external financing from banks or investment funds. These financial partners act on the basis of financing agreements signed directly with the SPV.

Public support and incentive mechanisms

Depending on the country and the technical solutions implemented, there are several public support mechanisms for decarbonisation. These generally involve agencies such as ADEME in France, which can provide financial support for the project via schemes such as the Fonds Chaleur. All our plants in operation have won ADEME GIST calls for projects.
There are also voluntary carbon offsetting mechanisms that provide private support for this type of project, either replacing or supplementing the public aid available.
The SPV also benefits directly from these support mechanisms, through aid agreements with the organisations concerned.

Public authorities and regulatory organisations

The local and national authorities issue the permits required to implement the project (building permits, environmental permits, etc.). These authorisations are granted directly by the SPV, as the entity responsible for building and operating the project.

Landowners

Setting up a project requires land to be made available. Newheat is responsible for identifying and contracting land with private owners. However, this contractualisation is carried out with the SPV directly, via the signature of an emphyteutic lease or an acquisition, thus guaranteeing the long-term future of the project.

The benefits of HPAs

For an industrial company or district heating network looking to integrate renewable energy into its supply, signing an HPA contract means they can anticipate and stabilise their heating costs while reducing their CO2 emissions. In short, you get better control of your energy bills while reducing your carbon footprint.

Economic benefits

No initial investment: the customer does not have to finance the design or construction of the installations. The entire cost of the project is borne by the heat supplier, enabling the customer to preserve its equity for its strategic activities.
Depending on the interpretation of accounting standards (whether French GAAP or IFRS), investments may not be consolidated in the customer’s accounts. We work closely with the statutory auditors to optimise the drafting of our contracts and encourage a favourable interpretation of this aspect.
Predictability and stability of costs: An HPA contract guarantees energy supply at a defined price over a long period, providing greater budget visibility and optimised cost management. Some technologies, such as geothermal or solar thermal, can offer price stability over time.
Performance guarantee: The heat supplier commits to a strictly defined level of performance throughout the life of the contract. If these performance levels are not achieved, the customer is covered by the application of indemnities and therefore bears no risk with regard to its heat supply.
Reduced operating costs: Customers benefit from competitive heat without having to develop in-house skills or manage the costs of maintenance, operation or infrastructure optimisation, which are borne by the supplier for the duration of the contract.

Technical benefits

Simple management: the supplier takes charge of the entire project, from design to construction and operation, with a single point of contact to support the customer at every stage.
Guaranteed maintenance and optimisation : Equipment maintenance, operation and supervision are managed by the supplier, allowing the customer to focus on its core business.
Energy performance: Thanks to expert management and ongoing optimisation, the installations guarantee a reliable, high-performance heat supply with maximum energy efficiency. The supplier’s income is guaranteed by performance, so it has a direct interest in the success of the project over time.

Risk management

Financial and operational risks are major obstacles to the development of decarbonisation projects.
Rigorous management of these risks is essential to secure the commitment of project financiers and achieve financial closure. It is also a guarantee of reliability for the customer, ensuring that the project will be carried out in accordance with the contractual commitments set out in the HPA.

Financial risks

Take or Pay” clause: This clause guarantees a minimum commitment on heat consumption.
Payment guarantees and termination clauses: Solid contractual mechanisms ensure the financial security of the project and clearly define the conditions in the event of each party failing to meet its commitments.

Design and implementation risks

New technologies and specific technical issues: Each solution for producing, storing and distributing renewable and recovered heat has its own specific features that need to be mastered to ensure the performance of the installations.

Operating and maintenance risks

Proactive equipment management: Preventive maintenance and ongoing optimisation of plant control guarantee a high level of performance and reliability, minimising the risk of disruptions to the heat supply.
Commitments to availability: The supplier makes a contractual commitment to an availability rate that guarantees continuity of heat supply.

In few words

Although HPA contracts offer many advantages, they also come with certain challenges.
With the right structuring and proven risk management mechanisms, these challenges can be effectively managed, ensuring a sustainable and secure supply of heat.

The Heat Purchase Agreement offers a strategic and operational solution for industries and heating networks wishing to make a commitment to decarbonisation without having to deal with the constraints of design, implementation, operation and financing. This fast-growing model is proving to be a suitable and accessible response to the objectives of reducing CO2 emissions, while at the same time reducing exposure to the volatility of heating costs.

Alongside the manufacturers and local authorities who place their trust in us, we are helping to strengthen France’s and Europe’s energy independence and trade balance, while supporting the creation of jobs that cannot be relocated. Together, we are helping to build a more sustainable, healthy and stable energy future for everyone.

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