In the last five years there has been a 750% increase in companies entering into renewable PPAs, and some 19.5GW of clean energy contracts were signed by more than 100 corporations in 2019. But what is a PPA and why should you care?
A Corporate Power Purchase Agreement (PPA) is a long-term contract under which a business agrees to purchase electricity and RECs directly from a renewable energy generator at an agreed price and without the need for a physical connection. A typical agreement is structured for 10-15 years, enabling the generator to secure funding from a lender to build the project. This is key in a world of diminishing subsidies for renewables, and when reaching the 1.5°C goal of the Paris Agreement requires the pace of adoption of renewables to increase 5-7 times by 2030. A PPA allows a company (the ‘offtaker’) to wear the ‘additionality’ badge – their actions led to new green electrons vibrating onto the grid.
There are three typical contract structures for the corporate PPA:
A physical or ‘sleeved PPA’ physically transmits electricity from the generator to the customer, with a third-party supplier ‘sleeving’ onto the traditional energy supply . The PPA will set the sale and purchase of electricity at a fixed price and allocate benefits (such as green certificates) In certain jurisdictions these provisions will also include obligations – see the white paper for details
A ‘virtual’ or ‘synthetic’ PPA, takes the form of a contract where the offtaker and generator agree a defined ‘strike price’ for power generated by a renewable energy facility. The agreement works as a financial hedge: if the spot price exceeds the PPA defined strike price, the generator pays the excess amount to the offtaker; if the market price for power is less than the strike price the offtaker pays the shortfall to the generator. The offtaker receives the RECs for every megawatt hour of energy that the project sells.
Private Wire PPAs are concerned with the sale of electricity from a generator to an offtaker. Power will normally be sold directly from the generator’s facility to the offtaker, rather than being notionally passed through a national power grid, and hence shield the offtaker from non-commodity costs. The generating facility will be located close to the offtaker’s assets and will usually only supply power to the offtaker.
The negotiation of Corporate PPAs requires the consideration of several factors and risks, including time to construct the project, technology type, contract length, shape and structure, and counterparty credit risk. We work with our clients to ensure they understand the risks and opportunities around CPPAs before they proceed.
The abundant supply of unbundled RECs means they can be so cheap they do not have any real financial impact on the projects they came from. As such they are not a long-term solution. Contracting with a named generator, allows your business to promote that your energy is coming from a specific renewable energy source and is directly investing in the growth of renewable energy generation.
If your business has yet to start the conversation around renewables, it won’t be long until outside factors force the issue. Pressure from consumers, business partners, employees, and investors are all pushing businesses to aggressively pursue sustainability goals. Economic fallout caused by Brexit and COVID-19 has only added to the fire. As subsidyfree renewables become a reality (and arguably the norm), and climate action shifts from the domain of CSR or ESG to the heart of corporate strategy, CPPAs are likely to play an increasingly important role in helping projects achieve financing, as well as meeting corporates’ long-term supply, energy cost and decarbonisation goals.