Notes
This week, we are joined by Corporate and Commercial lawyer, Nick Fothergill and Commercial solicitor, Christine Rishton, who explore the topic of Power Purchase Agreements.
Nick and Christine talk through the role and benefits of PPAs, highlighting the opportunities they can provide for UK businesses who are looking to decarbonise and reduce their energy costs.
Nick is a Corporate and Commercial lawyer specialising in energy and infrastructure transactions and general company law matters.
Nick's practice focuses on transactional and advisory work, and he has particular experience and expertise in the Energy (both renewable and conventional power) and Infrastructure sectors. He also has experience across a range of other industries and sectors, including financial services and transportation.
Christine is a Commercial solicitor with an extensive range of experience, but a particular focus on advising upon long-term energy infrastructure projects aimed at delivering the Government’s Net Zero Strategy. She helps clients with energy performance contracts and decentralised energy schemes, recently advising in relation to the formation of numerous energy performance contracts funded by way of the public sector decarbonisation scheme for the benefit of a number of NHS trusts.
Nick Fothergill: Hello, and welcome to the latest in our series of corporate insight podcasts here at Weightmans. Today, we are talking about power purchase agreements or PPAs as they're often known. My name is Nick Fothergill, and I am a partner in the Weightmans energy and utilities team.
Nick: I've been working on renewable energy matters for over 15 years now, and bring to them my experience as a corporate and commercial lawyer, focusing in particular on the mergers and acquisitions, joint venture, investment, regulatory restructuring, and commercial contract aspects of renewables projects.
Nick: I've worked on projects across the spectrum of renewable energy technologies, including onshore wind, offshore wind, solar, energy from waste, electricity transmission, and battery storage, as well as related energy services business as well.
Nick: I'm joined today by my colleague, Christine Rishton, who is also a member of the Weightmans energy and utilities team.
Nick: I'll let Christine introduce herself.
Christine Rishton: Hi. I'm Christine Rishton. I am a Principal Associate in Weightmans’ Energy and Utilities team. I've been working on renewable energy matters probably for approaching seven or eight years now.
Christine: My focus is predominantly commercial, and lately, I've been involved in the closure of a new numerous PSDS funded energy performance contracts, delivering energy and carbon efficiencies across the NHS.
Christine: I’ve advised on a number of, substantial energy performance contracts of reputational significance, and lately, I've been involved in advising a client in relation to the conclusion of a multi solution framework to deliver the UK's largest rooftop solar scheme.
Nick: Thanks, Christine.
Nick: The Weightmans Energy and Utilities team is drawn from across the firm and works closely with organisations across the energy sector, including major energy consumers, large utilities, project developers, investors, funders, new energy services companies, local authorities, and waste companies.
Nick: We have particular expertise in renewable generation, energy storage, low carbon heating projects, energy from waste, and planning and consents.
Nick: We're also experienced in helping businesses with their energy needs, helping them to both reduce their energy costs and at the same time achieve their sustainability goals.
Nick: Power purchase agreements are a big subject, and it would take a number of podcasts to delve into the topic in detail.
Nick: So, what we thought we'd do is to give you a bit of an overview of what power purchase agreements or PPAs, actually are, and some of the different types, and then talk a bit about how they might be relevant to businesses in the UK.
Nick: In essence, a PPA is a contract, usually a long-term contract, under which electricity generated by a power project is sold to an electricity supplier or consumer.
Nick: The PPA basically sets out the terms and conditions of that agreement to sell power, such as the amount of electricity to be supplied, the price, the duration, and what happens if there's a default, etc.
Nick: Project developers, people who build renewable energy generation facilities, can find it advantageous to enter into a PPA, the sale of the power produced by the project. The PPA can often help the project to secure financing, in particular, financing to help with its actual construction. The long term secure and stable revenue stream that can come with a PPA can help the project to repay its loans and so it's an attractive feature, to potential lenders to these projects.
Nick: As an alternative to a PPA, a project may look to sell its output on what is called a merchant basis, that is selling into the electricity spot market or under a short-term contract. This may be backed up with one of the various subsidy schemes available for certain renewables projects in the UK, such as the renewable obligation or RO regime as it's known, or the contract for difference or CFD regime.
Nick: Depending on the nature of the project, there may also be the possibility of benefiting from some form of backup power arrangement or agreement, such as participating in the UK's electricity balancing mechanism or the capacity market or providing short term ancillary services to help balance the grid.
Christine: We're now going to look at some of the key terms often found in PPAs and often negotiated over. The key terms of a PPA will usually be driven by the type of PPA being entered into. We'll be looking at some of the various types of PPA in a moment, but some of the key points to be aware of that often feature are as follows.
Christine: A long-term PPA will generally be a fairly bespoke contract, often quite carefully negotiated by the parties, while a shorter-term contract can often be based on standard industry documentation. It will need to be agreed how much power is being taken by the buyer, who is often called the offtaker. The contract may be for all of the power generated by the project, or the offtaker may only be taking specified amounts reflecting on its needs.
Christine: As a related point, it should be considered whether the generator will be required to guarantee the minimum output or availability of the project and whether the buyer will have exclusive rights to the power or control over sales to third parties.
Christine: The PPA could be set up to provide physical delivery of the actual electricity provided by the project. This is the case where the power project and the offtaker are physically situated close to each other and directly and physically connected by a private electricity connection, often known as a private wire arrangement.
Christine: Where this is not the case, the power needs to travel over the UK's electricity distribution or transmission system, and so the power received by the offtaker will not be the same actual power that was originally generated by the project.
Christine: In this scenario, a third party licensed electricity supplier will need to be involved as well as part of the PPA arrangement.
Christine: Sometimes, power projects produce renewables benefits and other benefits having a monetary value, and a decision will need to be taken as to who receive receives the value from these. Payment terms and pricing will need to be considered, such as whether it will be a take or pay contract and whether the electricity price will be subject to caps or collars, as well as what happens in the event that the project suffers a breakdown or if there is a change in the law.
Christine: Thought as to when the parties are entitled to terminate the PPA and whether there is a termination payment payable will often be key in planning and negotiating the PPA.
Christine: Another essential point to consider is whether either party will require security or a certain credit rating from the other to backup payment obligations or operational obligation. These are examples of some of the main points that will need to be considered as part of a PPA negotiation, but it is not an exhaustive list and will, to some extent, depend on the type of PPA involved. PPAs can be complex documents and taking legal advice will always be advisable.
Nick: We'll now turn to have a brief look at some of the different types of PPA that are seen.
Nick: PPAs generally divide up into two main types, physical PPAs and virtual or synthetic PPAs.
Nick: Physical PPAs involve the actual delivery of power from a generation project to the offtaker. When the project and the offtaker are in close proximity and connected by a private electricity connection or a private wire arrangement as it's sometimes known, this will generally mean the physical delivery of the actual electricity produced by the project.
Nick: Where the generating station and the offtaker are separated by distance, this will usually mean the delivery of power by a licensed supplier acting as a sort of middleman under what is sometimes called a sleeved PPA and so will not be the actual power generated by the project.
Nick: On the other hand, a virtual PPA is essentially a financial transaction only, an agreement for the financial settlement of power. In other words, it's a contract for difference.
Nick: The parties agree on a strike price for the electricity, and the generator pays the buyer if the market price goes above the strike price, and the buyer pays the generator if the market price goes below the strike price. There is no physical delivery of power on the project to the offtaker. The buyer does not receive green or any other power under the PPA, but it does get to control the price of its power.
Nick: Particular types of PPA that you may come across include a corporate PPA, which we'll look at further in a moment, as they're becoming increasingly popular.
Nick: Corporate PPAs are essentially a contract between a generator and a customer, allowing the customer to buy power directly from the generator, often green power, but without actually needing a physical connection to the project. They can be either physical PPAs or virtual PPAs.
Nick: Another type of PPA is a so called aggregated PPA, where in essence, a group of buyers club together to buy the power from a particular energy project, sometimes with one of them acting as a sort of anchor tenant.
Nick: This type of PPA can be attractive to SMEs, as they do not need to contract for all of the project's power, which may be more than they need, and they benefit from the combined credit worthiness of the purchasing group, and can also be shielded from any lack of procurement experience they have. Conversely, there are also portfolio PPAs, as they're known, where a number of different generation projects are combined together, but where they actually contract with a single buyer.
Nick: This allows the buyer to spread its energy procurement across different technologies, different projects, and so doesn't expose the buyer to the risk associated with a single type of energy generation, while at the same time optimising, generation potential and stability of power delivery.However, these types of PPA will be suitable for the larger energy user.
Nick: There are various other variations of PPA that could be considered, and it's a constantly evolving market with innovation occurring all the time and new products becoming available.
Nick: We'll just finally touch, in a bit more detail on a couple of PPA types, corporate PPAs and rooftop solar PPAs that are particularly relevant to UK companies and their businesses, and Christine will tell us a bit about those.
Christine: Thanks, Nick.
Christine: Firstly, corporate PPAs. We've talked briefly about corporate PPAs earlier. They are more suitable for larger electricity users and allow companies to fix their energy costs while also buying their power from an identifiable and green energy source.
Christine: This direct link to the generator and the long-term fixed nature of the pricing give the buyer something additional to a standard green electricity tariff offered by a supplier. Corporate PPAs can avoid some of the administrative and regulatory complexity of hosting private wire generation equipment on-site, although the power and industry cost savings from a private wire arrangement can be more beneficial than under a corporate PPA.
Christine: As we have mentioned, corporate PPAs do require the involvement of a licensed supplier in the arrangement, but the number of suppliers willing to provide this service has increased over recent years as demand for corporate PPAs has grown.
Christine: Corporate PPAs can take the form of either a virtual or a physical sleeved or back-to-back PPA where the supplier sleeves the electricity from the generator to the customer.
Christine: Corporate PPAs can be attractive to larger corporate energy users looking to fix or lower their energy costs while at the same time sourcing green power as part of achieving their sustainability goals.
Christine: Other advantages include that the supplier takes the risk of the intermittency of the power generation, which is a common feature of renewables energy generation, balancing the supply and ensuring the corporate customer receives a constant and steady supply of power. The customer may may also be able to acquire any green benefits associated with the renewable project.
Christine: In addition, while there may be some requirement to provide some collateral or security for its obligation to the generator, the corporate customer does not need to make any significant capital investment or outlay.
Nick: Thanks, Christine.
Nick: Next a bit about rooftop solar PPAs. These arrangements are being offered by an increasing number of providers in the market and can have a particular attraction for organisations with large warehouses or factories, which are well suited to hosting solar panels on the roof.
Nick: The provider usually arranges the design of the project, obtains the consents and permissions, and manages the installation of the kit with little or no upfront cost to the customer.
Nick: The parties then enter into a PPA, which provides the customer with fixed price electricity while the provider recovers its costs through the sale of the power. These PPAs often last for around 10 to 15 years, and the developer will usually remain responsible for the operation and maintenance of the equipment.
Nick: At the end of the PPA, a customer can remove or buy the kit or potentially extend the PPA. Again, a customer can access green power, manage its energy costs, and avoid large capital outlay while at the same time controlling its risk.
Nick: For these reasons, we're seeing increasing interest from our clients in looking at rooftop solar as an option.
Christine: In conclusion, and as we said at the beginning, power purchase agreements are a huge topic, and it's impossible to cover it fully within the time we have available for this podcast. However, we hope that you have found what we have said to be of interest and of use and that the role and benefits of PPAs have been highlighted, particularly the opportunities that they can provide for UK businesses looking to decarbonise and reduce their energy costs.
Nick: If you have any questions, or would like more information on anything we have talked about today, or if you have a project where you think we might be able to help, please do get in touch with either me or Christine, or with one of our other energy and utilities team members, and we would be delighted to speak with you. PPAs can be complex, and we would always recommend taking legal advice before thinking of contracting under a power purchase agreement.
