Bridging ambitions: the business case for corporate PPAs

Posted 2nd August 2019 | 1480 words | 7 minutes

European companies bought record amounts of clean energy in 2018 – more than double what they purchased the year before. Long-term renewable energy deals totalling 2.3GW were inked over the 1.1GW signed in 2017.

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With large energy consumers like Alcoa leading the way, corporate demand for reliable green power in Europe is surging. Procuring it, however, is still harder than it should be.

Corporates want more clean energy. Renewable power producers want to sell it. Bringing both together should be straightforward, but the ground between potential counterparties is strewn with business obstacles that can be difficult to navigate.

If the growing corporate appetite for green energy is going to be satisfied, energy buyers need a better way to sort through the maze of market risks, pricing uncertainties, and contractual complexities unique to clean energy procurement.

Power Purchase Agreements (PPAs) offer the best mechanism to do just that.

It’s clear now: business is onboard

While the private sector may have had reservations about the pace and achievability of green energy targets in the past, those days are gone.

Companies now want market recognition for their environmental commitments, and for many, sourcing clean energy is simply good business.

The cost of offshore wind, onshore wind, and solar photovoltaic (PV) deployment is going down, reducing the levelized cost of energy (LCOE) for renewables. We now see:

Onshore wind and solar now rank amongst the cheapest sources of energy on the grid. The cost of electricity coming from wind and solar farms is set to fall below prices in the wholesale market in Germany, France and Spain. In the UK, the cost of solar has dropped by 90% since 2010. In addition, direct procurement from renewable sources also offers a way to better connect with an environmentally conscious customer base.

US tech giants like Apple and Google were among the first to sign renewable PPAs. But times are changing, the market is opening and European companies – particularly those involved heavy industry like Norsk Hydro and Alcoa, have now jumped onboard.

Perhaps the broadest signal of corporate demand however is the expanding alliance of companies making clean energy and sustainability commitments.

The RE 100 group of 181 signatories have all set 100% renewable electricity targets. Cumulatively, these companies used an estimated 189TWh of power in 2017, roughly equal to Egypt’s annual electricity consumption.

But even if that weren’t happening, hundreds of gigawatts of new generation capacity will need to be found in order to offset the steady shuttering of thermal plan generation around Europe, and growing electricity demand from the electrification of heating and transport.

Renewable sources are the obvious answer.

Yet clean energy procurement isn’t getting easier

Bloomberg estimates that the RE 100 will need to purchase massive amounts of clean electricity –190TWh by 2030 – if they’re going to meet their targets.

But even as global corporate demand intensifies, the market for zero-carbon energy sources is entering a period of significant transition.

In the eyes of energy policymakers, a mounting tally of zero-carbon policy successes means they can re-think many of the stabilising, risk-mitigating market structures put in place to ease the shift to renewables.

Subsidies for offshore wind auctions have already been eliminated in Germany, and the government is signalling that further cuts to state support are coming – while pushing for more private sector investment to meet even more ambitious renewable targets.

The UK’s Renewables Obligation programme closed to new investment in April 2017, and the Feed-in-Tariff (FiT) subsidy scheme closed at the end of March. Only a limited £557 million has been made available for the allocation of Contracts for Difference (CfD) in upcoming auctions.

As an unintended consequence – and despite green energy moving into the mainstream – the state’s rapid withdrawal of funding and regulatory support is dampening investor enthusiasm for renewables projects.

The risk of a market logjam is growing

With the phasing out of relatively secure government subsidised pricing for green energy, financiers are less comfortable taking on the risks of wholesale market price exposure.

Finding a long-term solution for power offtake that offers sufficient revenue certainty is key to accessing limited recourse finance for infrastructure projects. Without a predictable revenue stream over the payback period of a project, projects become less bankable – and less likely to proceed.

And of course, price volatility is still an issue with renewables:

Depending on weather patterns there can be too much or too little clean energy capacity coming into the grid. Analysts worry about a cannibalisation effect if adding too much renewable capacity drops wholesale power prices into negative territory. While extreme weather events can disrupt generation entirely, risking a shift back to traditional carbon sources. So the market finds itself in a logjam:

Energy buyers want more clean energy and access to more projects.

Clean energy producers need to convince buyers and investors that their projects and business models have long-term viability.

Governments want to hit renewable energy targets – but projects are losing the state protection that gave them access to the limited recourse finance infrastructure projects require.

Financiers see demand growing for zero-carbon generation and want to invest – but need to see projects de-risked first.

Something’s got to give.

Enter Corporate Power Purchase Agreements

If all four stakeholders are going to benefit from rising demand and achieve their sustainable energy goals, there has to be a market shift. Corporate Power Purchase Agreements are increasingly becoming the bridging mechanism to make that happen.

PPAs for renewables allow corporate energy buyers to hedge against future fuel and power price volatility. The long-term agreement locks in or caps the clean power prices they’ll pay, and provides crucial visibility of future electricity costs for planning and forecasting. PPAs for renewables allow clean energy sellers to diversify their asset income streams away from traditional utility company off-takers. Corporate energy buyers provide both a new revenue opportunity, and a replacement for the stabilising impact of state involvement. As subsidy support for renewable energy shrinks and the policy environment evolves, engaging a broad customer base of corporate energy buyers can deliver the fillip stalled projects need to progress.

Corporate customers contracted for long-term purchase provide the certainty necessary to unlock finance – money that perhaps wouldn’t have been accessible if the project was dependent on a single utility or merchant market for its long term revenue stream.

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Wider acceptance, but barriers remain

Corporate appetite for PPAs is growing, but helping company energy buyers hit their renewable procurement targets is only part of the picture. Complexity in the PPA market is a serious barrier to wider adoption.

PPA’s are sophisticated legal arrangements and each one has different requirements depending on the geography, technology and capacity of the project; as well as market conditions, and the needs of counterparties and financiers.

There is no ‘standard PPA’ to use as template.

Any buyer’s search criteria can require analysis of hundreds of different data points before the case can be made to engage with a producer.

That’s one reason why only a handful of renewables projects have managed to be fully financed by Corporate PPAs without government support, and why many of the Corporate PPAs signed in recent years exist alongside subsidies.

Comfort level and experience can also be a barrier. For most corporate off-takers, power procurement is not their core business – yet to sign a PPA they must be comfortable agreeing longer-term energy deals rather than the short- to medium-term contracts that have dominated in the past.

That requires a deeper understanding of energy markets and likely future power prices. As a result, executing a new corporate PPA can be a lengthy, complex and time-consuming process.

Buyers need to work with a multitude of internal stakeholders: sustainability, procurement, accounting, treasury, tax, legal, and occasionally marketing will all be involved at some stage.

Decision makers may not be in the same business units or even know one another. To conclude the deal, energy buyers need the skill sets to anticipate and manage the concerns of these key players.

Unlocking the potential

All that complexity makes it hard for companies to find appropriate renewable sources, and for renewables projects to find motivated corporate buyers. Both parties need expert support if they are going to engage successfully.

The corporate PPA market received a boost from recent changes to the European Union Renewable Energy Directive, with member states now explicitly instructed to find and eliminate administrative barriers to corporate PPAs for wind and solar.

In North America, corporate PPAs have been a decisive factor in the growth of renewable generation. That same opportunity exists for Europe – if we can unlock their potential.

In a year when fossil fuels are predicted to produce less than half of UK electricity for first time, making it easier for clean energy buyers and sellers to find one another and work together effectively, takes on a greater sense of urgency.