Flexibility Purchase Agreement (FPA): Definition, Mechanics, and Examples

Definition

The term Flexibility Purchase Agreement was coined by analogy with the Power Purchase Agreement (PPA). In the German context, a PPA is typically a long-term supply contract for electricity from a specific generation facility or asset class, often renewable energy. A Flexibility Purchase Agreement, by contrast, does not deliver electricity in the narrower sense, but a schedule: the option to consume or supply electricity at a specific point in time. An FPA is frequently backed by a battery capable of shifting electricity from one point in time to another, thereby providing flexibility to offtakers. So while a PPA delivers a physical or financial asset, a Flexibility Purchase Agreement delivers optionality.

Virtual Battery as a Subcategory of the Flexibility Purchase Agreement

The terms Flexibility Purchase Agreement and virtual battery (FlexHL) are often used interchangeably, though strictly speaking they are not the same. A virtual battery follows a fixed logic: an asset with a specific specification — say, a one-hour battery — draws power during the cheapest hour of a 24-hour period and feeds it back in during the most expensive hour. For a two-hour battery, the same principle applies to the two cheapest and two most expensive hours. A Flexibility Purchase Agreement, on the other hand, can be structured in any way and is not necessarily bound to this high-low, or top-bottom, pattern. A virtual battery is therefore a standardized subcategory of a Flexibility Purchase Agreement, which in principle can also represent other technologies and contract structures.

Who Supplies and Who Buys Flexibility under an FPA?

As with a PPA, a Flexibility Purchase Agreement involves two contracting parties: one side that provides flexibility, and one side that purchases it. Typically, the party with physically available flexibility supplies it — classically a battery capable of shifting electricity in time. The concept is not limited to batteries, however. In principle, any asset with controllable load or generation is suited to act as a supplier under a Flexibility Purchase Agreement — for example gas- or coal-fired power plants on the generation side, or electrified industrial processes with thermal storage on the consumption side.

Example: flexibility exchange between two industrial companies

A paper mill has electrified its heat process and has a thermal storage unit. For the mill, it makes no difference whether the electricity for heat generation is drawn at noon, 1 p.m., 2 p.m., or 3 p.m. — meaning there is a degree of timing flexibility in its electricity offtake that can be commercialized. At a process output of one megawatt, this results in one megawatt-hour of flexibility per hour, which can be offered as a Flexibility Purchase Agreement. A second paper mill, whose heat process is not yet electrified and is therefore less flexible, purchases this optionality: it consumes at the desired hour, while the first mill in turn reduces its consumption during that time window. Both sides benefit — one monetizes existing flexibility, the other secures predictability at a fixed price.

How is a flexibility purchase agreement settled operationally and financially?

For settlement, the contract's time definition is decisive. If the purchasing party wants to exercise its option, it must report this by a contractually defined point in time so the supplying party can reduce its consumption or adjust its generation accordingly. Notice periods of roughly a quarter to half an hour before delivery are common. How the supplying party subsequently closes its own position is left up to it; a power trader can also handle this balancing on its behalf. The actual electricity delivery can take place either ahead of gate closure via intraday trading or, without issue, via a day-after schedule. For standardized Flexibility Purchase Agreements structured as a virtual battery, settlement is considerably simpler: since the contract fixes that the cheapest and most expensive hour are always used, these hours can already be determined after day-ahead settlement — settlement can then also take place on a purely financial basis, without physical delivery.

Flexibility purchase agreement versus full-supply contract

A full-supply contract already implicitly includes a flexibility option that the customer has always paid for — the provider factors this risk into the fixed price. In a power system with a growing share of weather-dependent renewable generation, however, price volatility is rising noticeably, which tends to make this built-in option within the full-supply contract more expensive as well. A Flexibility Purchase Agreement makes it possible to purchase this hedge specifically for the time periods and consumption profiles in which it is actually needed, rather than paying for it across the entire contract term.

FPA and PPA in combination

A Flexibility Purchase Agreement can be concluded as a stand-alone instrument, but it frequently complements one or more Power Purchase Agreements. Because the risk profiles of a PPA and a Flexibility Purchase Agreement typically move in opposite directions, the two instruments combine well. This is especially relevant for companies with a large solar PPA portfolio: the market value of solar power tends to fall as more solar capacity enters the system, while the value of battery storage rises in parallel, since batteries can absorb cheap solar power and release it again during later, more expensive hours. Companies with extensive solar PPA portfolios — large industrial offtakers, for example — are therefore increasingly using a Flexibility Purchase Agreement as an additional hedging instrument to protect the long-term value of their portfolio. Whether such a combination of several contracts pays off compared with a conventional full-supply contract depends above all on whether genuinely usable flexibility is available on site and how well the company's own consumption profile matches renewable generation.