Corporate Power Purchase Agreements or “Corporate PPAs” are getting a great deal of attention in the energy sector, and rightly so. Though not a new concept, with the first Corporate PPAs being entered into around a decade ago, recently there has been a dramatic increase in the number and size of Corporate PPAs being entered into globally.
In a nutshell, a Corporate PPA is a long-term contractual arrangement under which a corporate (rather than a utility/licensed electricity supplier) agrees to purchase electricity directly from a renewable energy generator at a fixed price. The green rights attributable to such power typically transfers to the corporate. According to a recent Bloomberg New Energy Finance Report, a record number of Corporate PPAs were entered into in 2017 (43 corporates in 10 different countries) amounting to 5.4GW of clean energy. Most of these deals were entered into in the United States, where Corporate PPAs are common. Momentum is gaining in the European markets and many expect a surge in Corporate PPAs over the next year or so. This rise in popularity of Corporate PPAs has not gone unnoticed in Ireland and at Philip Lee, we advised a large multinational on one of the first renewable energy Corporate PPAs in Ireland and continue to advise generators and corporates exploring similar opportunities.
Benefits of Corporate PPAs
Corporate PPAs are attractive to both renewable energy generators and corporates for a variety of reasons. For the corporates, particularly large tech companies with high energy demand and climate change high on their corporate agenda, entering into Corporate PPAs provides an opportunity for them to commit to using renewable energy, thereby enabling them to meet their sustainability and carbon reduction targets. The appetite to ‘go green’ is growing, with many corporates setting ambitious targets for renewable energy sourcing (often 100%) or emissions reduction.
A further driver for corporates is economics. Corporate PPAs allow corporates to lock in a fixed energy price, often at below-market prices, eliminating exposure to volatile energy prices.
For generators, entering into Corporate PPAs guarantees a long-term (typically 10-15 years) revenue stream and unlocks the availability of funding required to build out projects. The growth in Corporate PPAs worldwide is, in part, attributable to the fact that many of the government subsidies for renewable energy are diminishing or coming to an end and Corporate PPAs can, in some instances, act as a viable alternative route to market. In Ireland, the REFIT support schemes are closed to new entrants and their successor, the new Renewable Electricity Support Scheme, which will be an auction based regime, is unlikely to be available until 2019. The uncertainty as to timing or extent of support available for projects, and in particular certain technologies, leaves generators with little prospect of securing funding for their projects. A Corporate PPA with a financially strong counterparty would provide financial certainty and enhance the bankability of a project, whether or not it receives a subsidy.
Key Risks to be Managed
In considering entering into a Corporate PPA, both generators and corporates should be aware that there are a myriad of factors and risks to be addressed in the negotiations of the contract, for example:
Counterparty Credit Risk – The creditworthiness of the counterparty is a key issue for generators and their funders and requires evaluation prior to entering into the contract.
Energy Price Fluctuations – Given the long-term position taken on energy prices under a Corporate PPA, there is a risk that the Corporate PPA may not, during certain periods, offer the best price to the parties. This risk may be addressed in a number of ways in the Corporate PPA, such as including price floors and caps and collars.
Market Change – As the energy market is continuously evolving, these contracts should include a mechanism to address market and regulatory change. Typically this mechanism limits a party’s ability to terminate the Corporate PPA and instead provides for the contract to be re-negotiated to reflect the market changes whilst preserving the commercial balance between the parties. The Integrated Single Electricity Market (“I-SEM”), scheduled to go-live on 23 May 2018, will impact on Corporate PPAs and in particular, parties will need to agree who will be responsible for trading the electricity in I-SEM and how balancing risk will be shared.
Structure of Corporate PPAs
Corporate PPAs may take a number of different forms, ranging from physical transfer of power (sleeved) to a pure financial derivatives contract (synthetic). In Ireland, the most likely form will require the corporate to establish its own licensed supply company (similar to the ‘Supplier-Lite’ structure) and such affiliated supply company to then enter into the Corporate PPA with the generator. The corporate will also enter into an electricity supply contract with its affiliated supply company.
The significant growth in Corporate PPAs is a welcome development for the renewable energy sector as a whole. Although the original pioneers of Corporate PPAs were the high energy demand tech companies, all types of corporates can enjoy the environmental and economic benefits emanating from Corporate PPAs. For generators, Corporate PPAs may offer an alternative route to market where subsidies are unavailable. The complexity of Corporate PPAs should not dissuade generators and corporates from exploring these possibilities, as experienced advisors will be able to assist in managing the risks.