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New companies, new countries and new structures are putting corporate PPAs on course for continued growth.
Corporate purchases of clean energy rocketed last year. According to Bloomberg New Energy Finance (BNEF) figures, companies entered into power purchase agreements (PPAs) that supported 13.4GW of clean energy generation – more than double the 6.1GW in 2017.
“PPAs have a reputation as a good way for companies to buy renewable electricity as they allow them to manage energy costs, and there’s a tangibility to them – you can see the asset you’re buying power from,” says Sam Kimmins, Head of RE100 at The Climate Group, a collaboration of more than 170 global businesses committed to sourcing 100% of their electricity from renewables.
In 2015, just 3.3% of the contracts entered into by RE100 members to green their power consumption were corporate PPAs; by 2017, that had risen to 16%.
The market was pioneered by some of the world’s largest companies and biggest household names – such as Alphabet, Inc. subsidiary Google, Facebook, Microsoft, IKEA and Walmart, and with most activity taking place in North America. Last year, the market expanded into new jurisdictions and sectors.
Another year of such rapid growth is unlikely, says Kyle Harrison, a corporate sustainability analyst at BNEF, as many of the larger buyers have contracted large volumes of clean power and are unlikely to return to the market in the same volumes.
Nonetheless, with corporate concern about climate change and clean energy rising, new markets opening up to PPAs, and new PPA structures being developed to better meet consumers’ and renewable energy generators’ needs, providers are confident of strong continuing demand.
New companies are embracing PPAs
For many companies, the motivation to enter into corporate PPAs is economic. Contracts can run for 10 years or more, so can offer a long-term hedge against the risk of rising power prices; and therefore tend to be attractive in countries with high or volatile power prices.
Similarly, the declining cost of power from renewables projects – particularly in areas with good wind or solar resources – is helping increase PPAs’ economic attractiveness.
RE100 member T-Mobile USA, for instance, has calculated that its investments in renewable energy – including two 160MW PPAs struck with wind farms in the US – will save it US$100m over 15 years.
Meanwhile, many companies are choosing to procure renewable energy for reputational reasons, or to reduce their exposure to carbon emissions. For these buyers, PPAs can be more attractive than purchasing green tariffs from their utilities because of the direct link the PPA creates with a particular project, allowing buyers to demonstrate ‘additionality’ – that is, that their power purchases have led to the creation of additional renewable generating capacity, which supports sustainability ambitions.
Last year, a number of new companies and new sectors came to the market for the first time, for example ExxonMobil, which became the first oil major to enter into a PPA for its own power use, buying 575MW of wind and solar generation in Texas. These firsts are continuing into 2019: in the UK, Northumbrian Water entered into the first corporate PPA with an offshore wind farm, owned by Denmark’s Ørsted. Energy-intensive sectors are also entering the market, as shown by steel producer Sakthi’s 18-year PPA in Portugal with a 25MW wind farm.
New markets are opening up
In a number of jurisdictions, such as Japan and Indonesia, it is impossible – or at least extremely difficult – to enter into PPAs.
“For corporate PPAs to take place, electricity markets need to be deregulated and the right policies – enabling corporates to contract directly with developers and allowing renewable energy certificates to flow to the corporates – need to be in place,” says Phil Dominy, Director, Corporate Finance – Energy & Infrastructure at Ernst & Young LLP.
“We are trying to raise awareness that corporate PPAs can unlock huge amounts of investment in energy infrastructure that doesn’t have to come from the taxpayer,” says Kimmins, who notes that RE100 members alone account for 190TWh/year of power demand. “That’s quite a large opportunity,” he adds.
The effort is proving successful. In markets such as Taiwan, corporate PPAs are now possible, while in others – such as France, Spain and Australia – changing conditions are resulting in PPA volumes taking off.
In Taiwan, changes to electricity regulations mean non-utilities can now buy electricity directly from generators.
Alphabet’s subsidiary Google has become the first company to take advantage of this, striking a PPA with a 10MW solar array to be constructed over a commercial fishing pond. Harrison, at BNEF, anticipates strong demand for PPAs from Taiwanese manufacturers, given that many serve North American and European companies working to decarbonise their supply chains.
In France, the reduction in subsidies via increasingly competitive Government auctions is encouraging developers to seek alternative routes to market.
In March, Agregio, a subsidiary of utility EDF, announced the country’s first PPA, with retailer Metro France, to supply 25GWh of power from a wind farm operated by Eurowatt. Other companies are set to follow: Paris Aéroport and state-owned railway company SNCF have invited bids from developers.
Huge growth is anticipated in Spain, says Kimmins at The Climate Group, after the first PPAs were struck in 2018 by banks BBVA and Grupo Kutxabank.
Considerable local expertise was created during the boom years of the country’s generous feed-in tariff regime. Some is being put to work developing subsidy-free capacity that is attractive to buyers, and industrial firms are entering the market: in March, steel maker ArcelorMittal entered into a 10-year fixed-price PPA with two 5MW solar farms developed by the Foresight Group.
While not a new market, Australia saw particularly strong growth in 2017 and 2018, with 1.4GW and 1.9GW contracted respectively – up from less than 200MW in 2016. Corporate PPA growth has been driven by phasing out subsidies, falling technology costs, high electricity prices, good solar and wind resources, and a local renewables industry that has successfully driven down installation and operational costs, says Jomo Owusu, a Director in Infrastructure Advisory at Ernst & Young Australia.
New approaches are facilitating corporate PPA structuring
The two standard structures in the market continue to be the sleeved PPA, common in Europe, and the virtual PPA, typically used in the US.
Sleeved PPAs – also known as physical or back-to-back PPAs – involve a company entering into a PPA directly with a project, which supplies the generated power to a utility, which then supplies power to the corporate.
Virtual PPAs (also known as synthetic or financial PPAs) are simpler, with the buyer entering into a contract for difference with a renewable energy project around a fixed price – so, paying the project if the settlement market power prices are below the PPA price and receiving payment if they are above. Meanwhile, the corporate continues its energy supply agreement with its utility, while the project sells its power in the wholesale market.
Both these structures hedge the buyer against price rises, and enable the development of additional green power capacity.
In addition, however, new approaches are being developed to make corporate PPAs attractive to a wider range of buyers and sellers.
A growing number of contracts are structured as ‘firmed’ PPAs, with a utility or other trader smoothing out the supply of power from a wind or solar farm to make sure the buyer receives power that meets its needs. Sleeved PPAs can thus be ‘firmed’ into baseload blocks of power. Microsoft has pioneered the use of what it calls volume-firming agreements – otherwise known as proxy revenue swaps – which it has struck with insurance firm Allianz and investment fund Nephila Climate.
Aggregate PPAs allow multiple companies to pool their power demand to reach the scale needed to contract with a larger project.
These have proved popular in the Australian market; the Southern Sydney Regional Organisation of Councils (SSROC) entered into a PPA with the Moree Solar Farm last year, on behalf of 18 local authorities in New South Wales, and telecoms firm Telstra led a consortium that bought all the output from the first 226MW stage of the Murra Warra wind farm.
Such deals can allow larger, more experienced ‘anchor’ buyers to support smaller companies as they take their first steps into renewable energy procurement. In August, online retailer Etsy and software company Atamai joined other companies in a 290MW PPA with two renewables projects in the US.
However, there can be challenges in drafting contracts with more than one offtaker. “You need to ensure terms are as similar as possible, to minimise the due diligence requirements faced by the banks funding the project,” says Owusu, at EY. “The credit quality [of smaller buyers] can also be an issue,” given that these tend to be long-term contacts, he adds. “It can be like herding cats,” notes one developer.
Most PPAs are struck with new projects, with PPAs enabling ‘additional’ renewable energy capacity to be created and allowing corporate buyers to claim the credit. However, a new type of PPA, struck with existing projects, is allowing them to extend their useful life. In December, for example, car maker Mercedes announced a PPA with Norwegian energy company Statkraft to enable six wind farms in Germany – the FiT contracts for which were reaching their end – to continue operating.
Dubbed by Dominy as “anti-subtractability” PPAs, these contracts are likely to become popular because they tend to be of shorter duration than the long-term PPAs financiers usually require before they extend finance to new projects. To prove their environmental credentials, however, these PPAs necessitate due diligence, to ensure operators invest in the refurbishment usually needed.
An additional challenge faced by some multinational buyers is that it may not be feasible to enter into PPAs in each country in which they have operations.
But, in Europe in particular, growing market harmonisation and the interconnectivity of electricity markets are enabling multi-country PPAs, says Zosia Riesner, Head of Corporate PPA at Lightsource BP, a UK-based solar project developer. Clothing company Nike has pioneered this approach, with a 40MW PPA signed in February to meet the power demands of its European facilities from Iberdrola’s Cavar wind complex in Navarra, northern Spain.
Such transactions “can play to the strengths of the different marketplaces in Europe”, says Riesner, which have different renewable resources and power price dynamics. “This might be a good way of striking a balance of efficiency and price certainty, but it’s not without risk. Anything that goes from a simple in-country physical PPA to a more complicated multi-country (virtual) approach is always going to be more difficult,” she adds.
One challenge in closing deals is the mismatch between the long-term contracts funders seek to match the tenor of their debt and the shorter-term deals corporates prefer, says James Armstrong, Managing Partner at developer Bluefield LLP. “Corporates are looking for contracts that don’t lock them in,” he adds. However, banks and investors are increasingly willing to consider rolling PPAs, given the growing comfort that – when a PPA expires – the project will be able to find a new buyer for its power.
Conclusion: Coming to market – what companies should do
While a growing number of companies are turning to corporate PPAs to reduce emissions or control costs, the process can be challenging. Kimmins, at The Climate Group, says that – for smaller companies – the transaction costs can offset any potential savings, and even many larger firms do not have energy procurement teams able to manage the complex, and sometimes lengthy, contract negotiations.
Riesner, at Lightsource BP, says companies with uncertain future energy demand may find relatively long-term PPAs too restrictive, while it remains difficult for developers such as hers to enter into PPAs with businesses without good credit ratings. “But for buyers thinking long term who are committed to renewables… the market offers opportunities for innovation to meet their needs,” she adds.
“The market is complex and evolving quickly,” says Dominy, at EY. “Even for companies with significant internal resources, contracting in such a specialist field can be daunting – it pays to get expert advice, especially given that corporate PPAs usually require board-level sign-off. And given the length of these contracts, and the significant costs associated with terminating them early, boards tend to look for an impartial, third-party assessment of the business case.”
New players, new markets, and new approaches are all now working in harmony – transposing corporate PPAs to a higher pitch of activity. There are exciting times ahead for companies to play a key part in driving new investment in renewables.