Lessons from Sweden’s Wind Farm Insolvencies: What Went Wrong with the PPAs?

The financial distress and insolvency of several Swedish on-shore wind farm projects in the last couple of years, most notably Markbygden Ett, has exposed critical weaknesses in the power purchase agreements (PPAs) that underpinned their financing.

While these projects were initially viewed as low‑risk infrastructure investments, which should have been win-win for all involved, their collapse illustrates how poorly structured PPAs can amplify, rather than mitigate, core renewable energy and market volatility risks. Although the terms of the PPAs were confidential, the cause of the issues is an open secret discussed across industry media in recent months.

1. Baseload Commitments Misaligned with Intermittent Generation

A central flaw across the affected projects was the use of baseload-style PPAs requiring fixed volumes of electricity delivery, regardless of actual wind generation. For example, the ultimately Chinese owned project Markbygden Ett entered into a long-term agreement to supply a fixed annual volume of power to the Aluminium producer Norsk Hydro, despite inherently variable production. The inability to supply that fixed volume resulted in damages claims by Norsk Hydro which appear from court documents to be in excess of €200m.

When wind (or other intermittent renewable) outputs fall short of an obligation to provide fixed volume power supply, operators are contractually obliged to deliver the agreed volumes. This leads to the operator having to purchase electricity from other sources, frequently based on spot market prices which cause losses to the operator.

The cost consequences were severe, particularly during periods of high wholesale prices.

2. Over-Optimistic Production Assumptions

The Swedish wind PPAs were also premised on aggressive assumptions about wind availability and asset performance. In Markbygden Ett, generation was materially lower than expected compared to the forecast underpinning the PPA.

This overestimation translated directly into revenue shortfalls and increased reliance on external electricity purchases. The fundamental issue was not simply forecasting error, but the failure to embed realistic output variability into the contractual framework. The PPAs assumed near-continuous production, an assumption incompatible with wind generation characteristics.

3. Fixed Pricing Without Adequate Market Risk Allocation

The agreements also typically locked in fixed or predictable pricing structures over long durations (often close to 20 years), which initially appeared to hedge merchant risk. However, this rigidity proved problematic in volatile market conditions. [wind-watch.org]

When wholesale electricity prices surged following recent geopolitical shocks, operators faced a “buy high, sell low” dynamic under the fixed minimum supply contracts: they were forced to purchase power at elevated spot prices to meet delivery obligations, then sell it onwards at the lower fixed PPA price. Rather than mitigating price risk, the PPAs effectively transferred downside exposure to the generators without corresponding upside – causing a loss making contractual dynamic.

4. Failure to Address Systemic Market Effects

A further structural flaw in the contractual arrangements was the absence of mechanisms addressing cannibalisation risk — the phenomenon whereby high wind output actually depresses market prices for electricity. In Sweden, increased renewable penetration has led to periods of very low or even negative prices and the PPAs did not sufficiently account for this dynamic. As production increased across the system, realised revenues declined, undermining the economics of projects designed around static pricing assumptions.

5. Financing-Driven Contract Design

Finally, and perhaps the key takeaway from the Swedish winder farm failures, the affected PPAs appear to have been structured primarily to satisfy lender requirements rather than reflect operational realities. The lenders (banks) often required long-term, fixed-volume offtake agreements to de-risk revenue streams.

However, this led to “ambitious” contract terms that embedded unmanageable risks and downside for the operators. The resulting structures prioritised bankability at financial close over long-term resilience and operational realism.

Conclusion

The Swedish wind farm insolvencies demonstrate that PPAs effectiveness depends entirely on allocation of volume, price and market risks. The key lesson is clear: aligning contractual obligations with the physical realities of renewable generation is essential. Given the unpredictability and frequency of extreme/unexpected weather events as climate change increases, along with the precarious geopolitical situation, flexibility has become key to PPA terms. We are seeing PPAs terms already evolving towards more flexible volume commitments, price indexation and risk-sharing mechanisms — a necessary shift if the sector is to avoid repeating the costly mistakes seen in the Swedish Wind Farm failures.

Key Takeaways for Drafting PPAs (from the Swedish Wind Farm Failures)

1. Align volume obligations with generation reality

• Avoid firm baseload delivery commitments for intermittent assets (e.g. wind/solar).
• Use “as-generated” or shaped volume structures, or include tolerance bands and imbalance sharing mechanisms.

2. Allocate imbalance risk explicitly and fairly

• Give careful consideration to and fairly allocate who bears the cost of under-delivery and replacement power.
• Include caps, collars, or shared downside mechanisms to prevent unlimited exposure to spot market purchases.

3. Stress-test production assumptions

• Avoid being over-optimistic ad base PPA terms on conservative, downside-case generation forecasts.
• Build in flexibility (e.g. volume re-openers, periodic resets) if actual output materially deviates from prediction/contractual expectation.

4. Avoid rigid long-term fixed pricing

• Pure fixed-price structures can create “buy high, sell low” risk.
• Consider hybrid pricing (indexation, floors/ceilings, market-linked components) to better balance price risk.

5. Address cannibalisation and negative pricing risk

• Include provisions for curtailment, negative price periods, or minimum price thresholds.
• Consider revenue floor mechanisms or compensation where market prices collapse.

6. Build in contractual flexibility

• Include reopener clauses, renegotiation triggers, or hardship provisions for extreme market shifts.
• Allow termination rights or restructuring pathways that preserve value before insolvency risk crystallises.

7. Ensure bankability does not override operability

• Do not accept “lender-driven” terms that impose unrealistic delivery obligations.
• Align financing requirements with the operational characteristics of the asset.

8. Align incentives between generator and offtaker

• Structure risk-sharing so both parties are exposed to performance and market outcomes.
• Avoid one-sided risk transfer that becomes unsustainable over the life of the PPA.

If you have any queries relating to PPAs or commercial energy contracts do not hesitate to contact the article’s author and Head of Commercial Helen Brain who will be happy to have a chat.