PPAs - a new way for procuring renewable power
Businesses are already using PPAs to their advantage. With the right contractual foundation in place, securing deals can be sustainable in practice.
The countdown to COP26 has prompted renewed focus on the United Kingdom’s role as a leader in building a low-carbon future.
Business has a key part to play within this. Companies should not overlook the value of corporate Power Purchase Agreements (PPAs) to achieving their strategic decarbonisation goals.
PPAs are a new way of buying renewable power. There are a variety of different models. However, fundamentally, instead of purchasing electricity from a licensed electricity supplier, businesses contract directly with a renewable generator, without the need to be physically connected. This is usually on a long term basis and for a fixed price.
There are a number of benefits to doing this. Procuring power from renewable or low-carbon energy sources, such as wind and solar, will reduce an organisation’s carbon emissions. At a time where consumers’ purchasing decisions are increasingly influenced by brands’ environmental credentials, boosting low-carbon energy as a proportion of a firm’s energy mix can deliver a commercial and reputational advantage. The ability to be able to point to a specific renewable energy project from where a business purchases its energy is a powerful message.
But the benefits go beyond sustainability. PPAs’ are typically long term agreements with fixed price structures. This acts as a hedge, providing certainty and reducing exposure to fluctuations in the volatile wholesale energy market. For generators, the long-term revenue stream that a PPA provides can be the difference between a new-build renewable energy project being funded or not. As such, businesses which enter into PPAs really can be responsible for putting renewable MWs onto the grid.
PPAs are not, however, without their challenges. Organisations interested in Corporate PPAs must understand these risks, and how to manage them. The key risks 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 which 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 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.
Companies should not overlook the value of corporate Power Purchase Agreements (PPAs) to achieving their strategic decarbonisation goals.
Procuring power from renewable or low-carbon energy sources, such as wind and solar, will reduce an organisation’s carbon emissions.
For further information or guidance on PPAs, contact our energy solicitors.