EY UK Energy blog

Latest CfD strike prices leave only a 2-year window for corporate PPAs. Why and what action can you take?

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Posted: Friday, 26 July 2013 at 6.00am

Great to see a number of you on June 26th at the Green Corporate Energy event in London. We ran a popular Masterclass in the afternoon, together with BT and HSBC, on the subject of 'Buying renewable power - experiences from the market'. Certainly it appears that there is a strong appetite amongst large corporates to consider current renewable energy opportunities.

As you may have read in the press, in the past few weeks we have seen a flurry of activity in the UK renewables market with a number of announcements from Government before the summer break. Two of these in particular have grabbed my attention:

Contract-for-Difference strike prices released

Proposed CfD prices were issued on 27 June for various renewable technologies for the period 2014/15 to 2018/19. These are aimed to take over from the large-scale ROC-based installations by April 2017 and should provide more certainty of revenue streams for generators than the current system. However the CfDs are only being offered for 15 years (rather than 20) and indexed at CPI (generally lower than RPI). Final prices will not be fixed until the end of the year, but modelling indicates that project returns are likely to be lower than for ROCs (reflecting the lower level of perceived risk). Although the fixed prices will provide generators and investors with reduced risk, it also means that purchasers of energy are likely to lose out! Currently large consumers of power are able to negotiate long-term (10-20 year, index-linked) PPAs directly with off-site generators and then 'sleeve' the electricity via licensed suppliers to their UK facilities. Such deals currently indicate attractive long-term cost savings (assuming a forecast rising real cost of electricity) and price security for large consumers (amidst volatility in power markets). They also enable consumers to have a direct contractual relationship with a renewable energy generator - with consequential reputational benefits.

Government Procurement Service finalises its first long-term renewable PPA

The GPS has signed up to a 20-year power purchase agreement with a 37MW energy-from-waste plant in Teeside. Latest figures released in July indicate long-term savings are forecast to accumulate to £97m over the period. This is a win-win, providing fixed revenue for both the generator/investor and stable costs for the purchaser. Sadly, under CfDs this perfect combination will not be available. The generators will contract with the CfD Counterparty Body, which is controlled by the Government, for the top-up payments between reference price and strike price. Because these top-up payments will vary depending on the market price, a fixed price PPA from a consumer would not provide a generator with overall fixed revenues - exposing the generator to market price volatility. As a result this arrangement would be less attractive for capital providers, such as banks providing project finance, who are seeking guaranteed or 'bankable' revenues. One reaction to this could be for a PPA tied to the variable reference price - this would provide overall fixed revenues for the generator but clearly the PPA would not then be fixed for the purchaser!

So what does this mean for large consumers?

Unless the CfD arrangement is substantially changed, then there is only a narrow window of opportunity for large organisations (Private and Public Sector with strong credit-ratings and high consumption) to take advantage of the benefits of sleeved PPAs, with long-term price certainty and clear renewable energy association. Assuming an average 2-year construction period and a deadline of April 2017, the 'window' will close in less than 2 years time. It won't be possible under CfDs for both generator and purchaser to get stable prices/costs. Seize this opportunity to lock-in stable prices and renewable benefits!

At EY we have advised a number of large corporates in the UK market - formulating the initial strategy and then implementing the transactions for them. Please get in touch if you would like to discuss these issues and options further.

In October we are holding a free breakfast seminar at our London office to share our latest insights on the CfD and PPA issues discussed above. Please register your interest here. Hope to see you then.

Phil