The Blog - Wind energy market analysis

Posted 05/07/2018

Frances Salter

   

What are the main types of corporate power purchase agreements?

In Europe, corporate power purchase agreements will be a key tool for wind developers to take schemes to financial close in an era of low or no financial support from government.

We will discuss PPAs at our Financing Wind Europe conference in London on 1st November, and on our blog before that. This time, Frances Salter looks at how these deals work, and where in Europe they are being successfully deployed.

corporate PPAs 

In the last five years, there has been a boom in the number of multinationals looking to sign power purchase agreements (PPAs) for electricity produced by wind farms.

Campaigns such as RE100, which encourages companies to commit to use 100% renewable energy, have helped to motivate US tech giants such as Amazon, Apple, Google, Facebook and Microsoft to commit to greater renewables targets, as well as industrial players such as Anheuser-Busch, General Motors, Goldman Sachs, Mars, Target, Walmart and more. 

The American Wind Energy Association, for example, has reported that there are now more than 128 companies that have committed to 100% renewables. Historically, these PPAs are more widely-used in the US, because of frequent changes to the wind production tax credit before 2015; and because large utility-scale onshore wind schemes are attractive for buyers.

And now, corporate PPAs are set to become more of a feature in the European market too.

In June 2018, the European Union agreed a re-draft of its renewable energy directive, which tasks EU member states with investigating the hurdles to corporate PPAs in their countries, and then working to remove them. This is important because European governments have been cutting subsidies for the wind industry, and that will force developers to look at other ways to take their schemes to financial close.

Corporate PPAs can do exactly that, by giving the developers the long-term financial stability they need for their projects. 

And these deals don’t just benefit the developers – they benefit the electricity buyers too. 

As well as having the obvious environmental angle, businesses are increasingly aware of the financial and reputational benefits of PPAs. As we’ve explored in a previous blog post, we are seeing some large businesses are cutting out utilities altogether and simply buying their own wind farms. But, for many businesses, PPAs with utilities remain a popular option. 

Here is our introduction to the main types of corporate PPAs in the renewables sector...

 

What are the different types of PPA?

Onsite:

This is where the electricity is generated on the same site where it is used.

For example, retail giants such as Ikea, Target and Walmart have bought solar panels for the rooves of their buildings, which are then powered by the electricity generated. While this is a model that works for them, this isn’t practical for firms that don’t have large amounts of rooftop space to devote to solar panels. Rooftop solar is also a far more established sector that roof-mounted wind turbines.

The bulk of PPAs are offsite, and can be broken down into the following two types.

 

Synthetic/virtual:

In this type of contract, there is no physical delivery of electricity from a specific scheme to the buyer. Instead, the agreement is financial.

The buyer and generator agree a strike price. If the price of electricity on the open market price is higher than that strike price, the generator will pay the difference to the buyer. If the market price is lower, then the opposite is true. This gives both parties the long-term certainty over their power prices – and thus helps both to make investment decisions. 

The buyer will also need to be given the green certificates associated with the project, in order to demonstrate that they are meeting their renewable commitments.

 

Sleeved/physical:

In this kind of arrangement, the buyer enters into two PPAs: one with the generator that will supply the electricity, and one with a utility that will manage the off-take of power from the generation site. This gives the energy buyer the certainty over how much power it will use and how much it will pay; while leaving it to the generator and the utility to manage the off-take of power from the wind farm. This is commonly used in the UK.

This kind of PPA is intended to mitigate some of buyer’s risk, by agreeing in advance how the intermittency of electricity output would affect their electricity requirements.

However, these are not the only possible types of PPAs, and we to see new types are more countries grapple with the barriers to establishing PPAs in their own countries and how to solve them – as per the EU’s renewable energy directive.

As Norton Rose Fulbright writes in an online PPAs guide, these “are not the only approach possible” and others are being developed that could provide a more streamlined approach.

 

Which European countries are seeing most corporate PPAs? 

Generally, countries with a clear regulatory framework tend to attract more PPAs, as this provides a stable environment and therefore minimises risk.

In our Finance Quarterly ebook, we’ve explored in more depth why so many corporations have signed Scandinavian PPAs in the last year: Facebook, for instance, signed three deals with wind schemes in Norway in May 2018.

This is largely because the power market in Scandinavia is a well-regulated and predictable market, which gives corporations the confidence to sign agreements there, and currently offers low power prices. PPAs work best in countries where governments have historically been supportive of renewables, but aren’t necessarily offering long-term contracts to these projects themselves, as this opens up the potential for private companies to fill the gap. 

We’ll be looking at corporate PPAs in more depth in our blog over the coming months, and it will be a central theme at our Financing Wind Europe conference on 1st November 2018. For more details and to book tickets, please visit www.financingwind.com.

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