What drives Corporate power purchase agreement (Corporate PPA) growth?

Fragment from the article originaly published in PFI (April 2017)

Buy-side drivers

Environmental

A corporate PPA can assist in the delivery of a corporation’s sustainability commitments. Large numbers of corporations have set ambitious targets for renewable energy sourcing or emissions reduction – whether via leading organisations such as RE100 or independently. Meeting these commitments can be done relatively simply through the purchase of green power products from their utility supplier or procuring renewable energy certificates matching their needs (such as Renewable Energy Certificates in the United States or Guarantees of Origin in the European Union). Some corporations want to go beyond purchasing schemes, looking for opportunities by which they can demonstrate additionality.

Approaches to additionality can differ but in most cases it turns on the idea that the entry into the PPA by the corporation is a material reason for a renewable energy project occurring (such as offering a long term price to a greenfield renewable project) or further projects occurring (such as enabling a refinancing to free up capital for further investments). A recent example of an “additional” PPA is Nestlé UK’s entry into a long term PPA with Community Wind Power for a greenfield Scottish onshore wind project, under which up to 50% of Nestle UK’s electricity requirements can be met.

Economic

A long term corporate PPA with the right pricing structure can also provide a hedge against rising electricity costs. A number of early corporate PPAs adopted relatively straight forward pricing structures, such as a fixed price which can escalate in line with inflation. Although acting as an important hedge if prices rise, these also bear risk if markets move lower. In some markets this has driven more sophisticated pricing structures that allow for price re-openers if there are significant market movements. Other approaches include floating price structures with a cap and floor to provide mutually acceptable risk mitigation for the parties.

Sell side drivers

From the sell-side, the need or interest in a corporate PPA is often driven by wider market design aspects for renewable projects.

Long term revenue certainty (for finance)

Markets which have seen the greatest growth, such as the United States and United Kingdom, are ones where subsidy support for renewables leaves projects with the need to optimise their electricity sales. In the US, this is because support has been provided through tax credits. In the UK, this was the case under the previous green certificate regime known as the Renewables Obligation. Finding a long term solution for power offtake that includes sufficient revenue certainty is key to accessing limited recourse finance. In these markets, long term PPAs with utility offtakers are available. However, corporate PPAs can diversify these offerings. In the right circumstances they can, for example, provide a better floor price (or fixed price) for a project than is available in the market generally (although that may come at the cost of future upside value).

Longer term prices

In other markets, a corporate PPA can solve a particular market issue. A good example of such an issue is the Netherlands, where the floor value on the government support regime creates a risk for projects in the scenario of a future low price market. This is not something utility offtakers have usually been able to solve. Corporate offtakers have been able to do so, as evidenced by the recent multi-buyer transaction with the Krammer wind park. The corporate buyers can take this risk on as they are naturally hedged in that a low price environment is also one which will have wider benefits for the corporations involved (as their electricity costs in the Netherlands will generally be reduced).

The mutual interest in long term price certainty will be very relevant as some markets move to remove subsidies for certain mature renewable energy technologies. Even where cost reductions for a technology type have arguably enabled prices for renewable energy assets to reach parity with grid prices, the need for long term revenue certainty for power sales remains key to bankability. Bankability captures the idea that a project has a sufficiently balanced risk profile that lenders are willing to finance it. Revenue contracts such as a PPA are key to this assessment. A corporate PPA can offer bankability, thus providing an important bridge to the development of wider and more diverse financing and offtake solutions in the market, particularly those that bear a greater degree of merchant risk.

New market opportunities

Beyond these immediate economic drivers, there are a wider reasons for developers being interested in entering into long term transactions with corporate buyers. Some corporate buyers are attracted by corporate PPAs in emerging markets where they have facilities. Developers operating globally or regionally may have plans to accelerate development in these markets. This creates opportunities for wider partnerships between developers and corporate buyers whereby a corporate buyer’s strategic ambitions for corporate PPAs are delivered by the developer. The structure of these partnerships can take a variety of approaches. Some involve delivery by the developer of the target capacity across selected jurisdictions (often encompassing both onsite and offsite solutions). Others operate more as a management service by which the developer locates quality opportunities.