Is the corporate PPA about to have its day?

A new type of power purchase agreement that has found success in the US is coming to the UK.

An increasing focus on energy costs combined with a desire from businesses to ‘green’ their supply chain is providing a strong push to engage more directly with generators.

The move from fixed subsidies to a more competitive market for generators has meant any certainty in the project finance stage is welcome.

Corporate PPAs are increasingly being seen as a way to bridge the gap between these parties, securing benefits for both.

Pinsent Masons’ Senior Associate Ronan Lambe sets the scene:

“The rise of corporate PPAs can be seen as the culmination of two separate trends.“Energy use is a key focus in many corporate boardrooms. Large energy users have always had reduction of energy costs at the front of their minds but are now increasingly under pressure to demonstrate to shareholders that they are taking steps to procure that energy in a sustainable way.

“Secondly, in a low or no subsidy environment developers of renewable energy projects are under pressure to cut costs and innovate in order to survive.

“Corporate PPAs can offer a solution to both parties: providing a useful hedge for the large energy user against increases in power prices and short term price volatility while providing the project developer with a vital long term route to market for the power it produces, underpinning the economics of the project.”

For Vicky O’Connor, a Senior Consultant at K2 Management, the attraction is an alignment of “more informed project financing” for generators and “healthy marketing competition” among corporates.

She says:

“A corporate PPA, like any PPA, provides unit energy price surety for the length of the term, which benefits predictability of returns, and thus the business case of the project.

“From experience, the involvement of the corporate party early in the development process (i.e. before the wind farm is operational) allows for the weight of the corporate PPA to provide maximum benefit in ensuring more informed project financing.

“Besides the finance-related benefits, we also see a desire from the corporate world to be greener and have their brand associated with sustainability, and PPAs are an attractive way to meet that as an alternative to direct investment in renewable assets.

“Businesses being powered 100% by renewables has started to appear increasingly in brand marketing and has led to some healthy competition between established sector competitors.

“This push to 100% power by renewable means has been reflected strongly in the formation of the RE100 group last September, with 87 of the world’s leading companies pledging to do just that, from manufacturing and tech companies to financial services.”

“More informed project financing”, as spelled out above by K2, helps lower investment costs – a factor which is increasingly important in today’s more competitive environment.

Early corporate PPA movers in the UK include Marks & Spencer, whose multi-award winning “Price Guarantee Agreement” was a relatively simple form of contract for difference, and latterly major corporates including BT, M&S, Nestle, McDonalds, HSBC, Lloyds, and Nationwide.

As Pinsent Masons’ Ronan points out, corporate PPAs

“have been a mainstay of the US power purchase market for a number of years, with more PPAs being written by corporates and governmental bodies in 2015 than utilities”.

He continues:

“The models developed in the US market have been successfully implemented in many other markets in recent years, including in the UK.

“Parties involved in negotiating a corporate PPA (which may include a Licensed Electricity Supplier and a debt or equity provider, in addition to the energy user and developer) face a number of challenges which may go some way to explaining why the uptake of such arrangements in the UK has been relatively low to date.

“Key among these is educating decision makers within the energy user on the structure and getting sufficient buy-in on any long term fixed price being offered for the energy produced.”

The mechanics of PPAs are a topic for further discussion, and a Scottish Renewables event in Glasgow on April 26 – which Pinsent Masons is kindly sponsoring and at which Ronan Lambe will be speaking – will do just that.

The morning’s programme will cover:

• Commercial drivers: what are the opportunities for business that come with contracting directly with renewable generators?
• Contractual challenges
• Commercial, technical, financial and legal issues, and how they can be surmounted.

We’ll also feature a case study session titled Corporate PPAs in Action and devote time to a panel discussion asking Is the corporate PPA a sustainable solution?
To book tickets, visit our website.

If you can’t make it along on the 26th, the Evolving Customers session at our Annual Conference tomorrow will hear from Rob Williams, General Manager, Procurement - Utilities, Power & Cooling for BT.

Rob will share the challenges the company overcame to top Carbon Clear’s FTSE100 sustainability rankings for three years in a row, the benefits a move to cleaner power has delivered and the lessons learned, before setting out his advice for generators looking to engage with the growing corporate market for clean power.

He will also look at how BT intends to drive down emissions further from across its business – and keep its place in the very top tier of UK sustainable business.