Corporate power purchase agreements (PPAs) — The benefits and challenges
With energy prices skyrocketing and pressure growing on companies to reduce their carbon emissions, we look at an option you may not have considered.
Energy prices are the number one issue facing many organisations today. While the Government has announced plans to introduce a price cap for businesses, this support will only be temporary.
It is more important than ever for organisations to look to the future and safeguard their long-term energy security. At the same time, the rise of the ESG agenda and increasing pressure from external stakeholders means it is equally important for organisations to take strategic steps to reduce their carbon emissions and improve their sustainability.
So where should you begin to achieve these goals? While there is no silver bullet, procuring renewable power under a corporate power purchase agreement (or corporate PPA) could be an excellent place to start.
What is a corporate PPA?
A corporate PPA is a fundamentally different way of buying power. Instead of purchasing electricity from a licensed supplier, a corporate PPA is a long-term agreement between a corporate consumer and a renewable generator to buy the power which is generated from a renewable energy project, such as a solar farm or wind farm, together with the renewable certificates of origin which relate to that power.
What are the benefits of power purchase agreements?
There are various types of power purchase agreement. However, at their core, they all provide some kind of financial hedge or price fixing.
This protects organisations from exposure to highly volatile wholesale energy costs and any periods of sustained price increases. Over a long term, it could also lead to significant cost savings.
While there is risk of being “out of the money” during periods where wholesale prices are lower than your fixed price, the certainty of knowing in advance how much you need to budget for electricity over a year is still a significant benefit.
Sustainability is increasingly important to all organisations.
From 6 April 2022, mandatory disclosures of climate-related financial information for over 1,300 of the UK's largest businesses has enhanced the importance of decarbonising for corporates.
Meanwhile, business-critical factors such as customer purchasing decisions, staff retention, and the ability to attract external investment are increasingly influenced by an organisation’s sustainability.
Corporate PPAs allow organisations to lower their overall carbon emissions by arranging long-term supply agreements directly from renewable or low-carbon energy sources, such as wind, solar or biogas. Increasing the proportion of renewable power in an organisation’s energy mix can also bestow a commercial and reputational advantage.
Additional renewable MWHs
A key benefit of a corporate PPA is that the long-term revenue stream which it provides to a renewable developer can be the difference between the construction of a renewable energy project being funded or not — boosting the overall deployment of renewable generation.
A PPA therefore facilitates the financing and construction of new renewable generation projects, bringing “additional” renewable MWhs onto the grid.
This is a key driver for many organisations and can prevent any accusations of “greenwashing”.
What are the challenges of power purchase agreements?
As a different way of procuring power, PPAs are not completely without their challenges. Organisations interested in corporate PPAs must understand these risks and consider how to manage them.
The key risks of a power purchase agreement are associated with:
- Volume — variations in weather or other factors can result in lower volumes of energy being generated than anticipated;
- Profile — while total volume may be as forecast, the intermittent peaks and troughs of production may not match with a business’ demand; and
- Price — movements in the wholesale market could see an initially favourable fixed price becoming less so over time.
Each of these exposes a business to a commercial risk that they have previously not had to manage. Allocating the risk for these issues is a key part of any PPA negotiation.
In terms of volume and profile, one solution is agreeing fixed volumes or ‘shaped’ profiles with the generator, rather than purchasing on a ‘pay-as-produced’ basis. Where volumes or profiles fall outside those parameters, the generator is liable for the cost of any additional balancing power which is required. In terms of the price risk, another option is to negotiate a more bespoke ‘floating’ price structure, with fixed floors and ceilings or providing for periodic price review mechanisms.
However, the generator will have its own interests which it also needs to protect and possible requirements from its own lenders or funders for the project. Pulling any one of the contractual levers above will impact other parts of the PPA agreement. For example, fixing volumes will likely result in a higher price than under a ‘pay-as-produced’ contract. But with careful planning and the right advice, a balance can be reached.
Already the likes of Tesco, Unilever, Nestle, Shell, Sainsbury, Nationwide, City of London Corporation, AB InBev and Amazon are using PPAs to their advantage, and others can follow suit. Managing risks is critical. With the right contractual foundation in place, businesses can secure deals that are sustainable in practice and nature.
The long-term benefits which a corporate PPA can provide should not be understated, both from a commercial and sustainability perspective. It is increasingly important for businesses to incorporate sustainability into their long-term strategies and corporate PPAs have the potential to confer strategic commercial advantages for those companies that are able to take the right steps.
At Weightmans, we are actively engaged on advising clients who wish to conclude corporate PPAs. We have recently advised an international manufacturing company on the negotiation of a 130 MW corporate PPA and we are also advising clients on a number of “private wire” PPAs utilising on-site generation of renewable energy.
Please get in touch with our expert energy lawyers to see how we can help you to achieve your long-term energy security and sustainability goals.