CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS – PPAs
A Corporate Renewable PPA is a bilateral renewable energy purchasing agreement where renewable power producers and buyers (also called offtakers) agree on the terms such as structure, pricing mechanisms, risk allocation, tenor, and applications regarding non-compliance etc. These contracts are usually signed for long-term periods; mostly for 5-to-20 years.
For power producers, signing a PPA provides bankability to the project, since financial intermediaries are more willing to support projects which allocate, distribute, mitigate, or remove certain commercial risks. PPAs mitigate the uncertainties in the cash flow by guaranteeing the sale of generated electricity at fixed or competitive prices. Reduced revenue uncertainty provided by PPAs might increase financial flexibility and reduce budget constraints. Thus, the deal paves the way for investing into newer projects easier, and therefore, spreading the energy transition further and for the better.
For offtakers such as energy-intensive corporates, the first benefit of signing a renewable PPA is supplying trackable and renewable energy to meet offtakers consumption and their sustainability targets. Second, PPAs provide visibility by offering fixed or competitive energy costs. They significantly reduce the exposure to the market volatility - that we observe more often than anything in today’s energy markets. Considering few major macroeconomic events that occurred in the past 3 years, such as post-pandemic economic recovery and resultant increase in energy demand worldwide, the War in Ukraine and the energy crisis, increasing inflation rates led by high energy prices (44% energy inflation in Europe), and disruptions in the global supply chain: having signed even a 5-year PPA would have create a significant difference. Therefore, PPAs are considered as effective hedging tools when the risks associated are allocated evenly and justly. For fair and equitable allocation of risks and the successful administration of the PPAs, you have Pure, an independent, expert energy service provider and a PPA aggregator.
Along with the direct economic benefits, PPAs also contribute to green energy transition by indirectly financing renewable projects and helping decarbonize the electricity consumption of the offtakers. Every megawatt (MW) of energy procured can be certified & redeemed by Pure as renewable energy and therefore can be utilized to reduce the Greenhouse Gas Scope 2 Emissions.
The corporate PPA market in Europe has grown dramatically in recent years. In 2019 alone, despite of the pandemic, 2.5GW of PPA’s were signed. In 2020, About one-fifth of the 33.4GW of renewable installations in Europe, approximately 5.8GW, haves been signed PPAs. This number is increased to a 8.7GW in 2021, and it is expected to increase even further in the coming years.
HOW DO PPA’S WORK?
PPAs are designed in a tailor-made fashion in Pure – that is, providing structures concerning tenor, hedging, balancing, distribution of risks (profile risk, liquidity risk etc.), environmental impact, ownership, location, and more key factors. The most suitable option would depend on these factors and of course - the needs and preferences of counterparties which we treat specially and carefully.
In an On-Site PPA, a third-party construct, operate and maintain the renewable installments. Corporate consumes the power generated from agreed prices through a Corporate PPA. If the corporate faicility is rented, the landlord must give facility of the corporate is rented, relevant permissions regarding the installments must be given by the landlord, to prevent future non-compliances.
In this setup, installations usually cover for near-full or %100 of the consumption. If any, excess power is sold into the market via the grid. Self-consumption of the corporate may account for GHG Scope 1 emission reductions. Certificates may only be created if there is any excess power that is meant to be sold to the energy markets.
Plant installation is usually located in near or adjacent to the consumer, and the two are connected via a “private-wire”. Installed land can be owned or leased from the consumer or an independent third party. The private wire is connected behind the meter, thus, not connected to the grid. If there is any excess power, a grid connection may be needed to establish, to manage excess power properly. The cost associated with the grid connection and private wire connections are included in the PPA prices. This kind of a PPA might be in use in countries which with has insufficient/poor grid connections.
Physical PPAs are the supply of power at the metering point – where delivery and receipt of energy are measured. In this form, energy is supplied by utilities through the grid. If the agreement is realized via an intermediary, it’s called a Sleeved Physical PPA, where the intermediary takes a sleeving fee from the buyers in return of their services:
a) facilitating the transfers between the parties (i.e., energy, funds),
b) mitigating the risks associated with wholesale market fluctuations
One of the key distinctions of a physical PPA is providing additionality. That is, giving rise to the creation of a brand-new renewable energy facility that would not have been created otherwise. Offtakers have direct impact over adding new renewable capacity to the grid and thus, creating positive impact for the environment.
Alternatively, physical PPA’s can be signed with the existing power plants too. However, this form of PPA is waived from the additionality claims and consequently therefore has lesser added value to the renewable energy value chain.
Virtual or Financial PPAs, offer no need for physical supply of the electricity. Instead, Virtual PPAs are Contracts for Differences (CfD) which does not involve physical delivery of electricity.
In Virtual PPAs, offtakers are expected to meet their electricity load from traditional channels (e.g., electricity markets) and then settle for pricing differences. For instance, if the market price is greater than the agreed-VPPA price, offtaker/buyer receives the difference and vice versa: if the market price is lesser, seller receives the difference. It is an easier way to implement compared to the physical PPAs and thus a quicker, more practical way to satisfy the sustainability goals of corporates whose consumption points may be spread across different regions.
In this structure, several corporates form a consortium to contract the power from a single power generator. This consortium typically includes companies from different sectors so that economic competitors from the same sectors are not included in the same deal. This structure allocates the costs and process burden among the buyers whereas for the sellers, the credit risk of the buyers can be diversified, and more power can be sold under a single contract.
Multi-seller PPA’s are feasible for satisfying the energy needs of very large companies/conglomerates such as Google, Amazon etc. This structure includes an independent aggregator – like Pure – who creates a portfolio including multiple sellers and then sign a PPA with the corporate buyer. Construction and commissioning risks belongs to this aggregator. This method allows meeting the demands of large corporates while avoiding the need for several PPA contracts. Another benefit of this structure is that local, relatively small energy generators might be supported if combined into a single, large energy portfolio.
Cross-Border PPAs can be thought as the preferred models above, only done across borders, including physical and financial PPAs. It allows corporates to buy energy from where it is feasible, regardless of the country of operation and the insufficiency of its’ power market.
Yet, such deals are seen less frequently than the others in Europe. The essential problem here is the spread risk, which is the risk of mismatching prices between countries that the deal is made. One other problem is the lack of interconnectivity of the power grid.