Weighing up corporate PPAS
The announcement last week that Vattenfall will seek to offer corporate power purchase agreements to provide renewable energy from its new wind farm is likely to spark renewed interest in these electricity supply contracts.
Most businesses buy their electricity in the traditional way – direct from suppliers such as Scottish Power, SSE and EDF. Corporate PPAS give businesses the opportunity to purchase power directly from a source of renewable generation, be it a wind farm, biomass facility, hydro or solar array.
The power is delivered via the national grid and is not to be confused with a private wire agreement, under which power is delivered from the renewable source by a dedicated power cable, operating off-grid (or “behind the meter”).
The corporate PPA is a long-term agreement (ten to 20 years) between generator and customer to buy some or all of the electrical output of a renewable generation facility. The PPA guarantees the generator’s revenue stream by setting a fixed price (usually indexlinked) paid by a customer of good standing.
In the absence of new subsidies, renewable developments, in particular onshore wind, are struggling to raise funds based purely on selling into the wholesale markets. By signing up a longterm purchaser, developers can unlock capital and business customers can facilitate new green power development.
Corporate PPAS may be of significant interest to businesses for a variety of reasons: ● They meet key corporate social responsibility and sustainability targets through reduction in carbon emissions ● They establish or improve green credentials with recognition for leadership and achievements in renewables ● With long-term power prices being uncertain, a PPA gives long-term price security, visibility and stability, and enables hedging of risk on the power markets ● Security of supply and increased resilience ● They enhance branding and customer awareness, and improve investor and employee engagement.
But what are the challenges? ● Legal and commercial complexities of the deal require a significant commitment of time and effort, a co-operative electricity supplier and, usually, a promoter at board level ● The forward planning window and financial priorities of the business must match the timescales and drivers for the corporate PPA (ten to 20 years) ● The project must be fundable and the business may need to be flexible in its requirements to address bankability ● Getting the price right ● Matching the output of the facility to the needs of the business, although a PPA can introduce opportunities for aggregation across multiple interested businesses . David Mcguire is a partner at legal firm Macroberts LLP