Summary: Corporate PPAs are currently a hot topic for buyers and suppliers of renewable energy. BLP and Noveus Energy co-hosted a roundtable which brought together representatives from across the market to discuss their potential. Below is a summary of key themes and talking points explored during the rountable discussion.
Aims of the roundtable
Corporate PPAs are currently a hot topic for buyers and suppliers of renewable energy.
Increasingly the US is seen as a pacesetter - with thirty-one offsite Corporate PPAs (excluding government and university contracts) for 3.1GW of capacity signed in 2015.
Corporate PPAs engage a variety of actors in the renewables space – generators, investors, funders, corporate buyers and suppliers – all of whom have a vital role to play in this market.
The roundtable, co-hosted by BLP and Noveus Energy, brought together representatives from all of these market areas to explore:
- what the drivers are behind Corporate PPAs in the UK;
- whether the UK too will see an upsurge in Corporate PPA activity and if not, why not;
- any barriers to growth and how they may be broken down; and
- what the future might hold for opportunities in this area.
Key themes and talking points
Why enter into a Corporate PPA? Why now?
Our roundtable discussion explored the fundamental drivers for participants in these arrangements.
Unsurprisingly, for corporates, cost/volatility management and compliance with sustainability agendas and targets were prime considerations.
Generators, investors and funders, particularly in light of a reduction of utility provided PPAs, see corporates as a viable vehicle to address the need for a long term and stable project revenue flow.
Suppliers often see their primary role as regulatory facilitators of corporates’ and generators’ PPA deals – primarily through “sleeving” PPA product or entering into synthetic or “back to back” PPA arrangements.
At the roundtable, diversity of views over the relative importance of these various drivers ensured open debate. However there was unanimity that the Corporate PPA market has the potential to play an important part in:
- unlocking investment;
- increasing energy source diversity for corporates; and
- meeting corporates’ sustainability targets,
provided identified barriers can be overcome or mitigated.
Is it possible to successfully balance the parties’ expectations on term, pricing and other investment and bankability considerations?
The participants explored the difficult balancing act involved in developing pricing models that are attractive to corporates, profitable for generators and acceptable to investors and funders.
Investors’ and funders’ historical preference for long term fixed pricing is under pressure.
Where such pricing structures are offered corporates run the risk of being “out of the money”. Once bitten, twice shy. Even if the likely trajectory of long term power prices continues to be upward, the recent sustained period of low prices may reinforce a “why now” attitude for the short and medium term or at least a much tougher negotiation on price.
However, pricing models designed to find a middle ground have been offered for some time.
Caps and floors may provide additional pricing flexibility that could assist in aligning project requirements and corporate drivers.
There may be an increased urgency in refining these models. The sector is now struggling to deal with the perfect storm of subsidy reduction and increased network charges.
Some corporates (perhaps particularly in regulated sectors that have cyclical financial settlements) could seek shorter term PPAs that the new build renewables market – but not the secondary market – may find hard to accommodate.
For investors, funders and generators a reduction in utility provided PPAs also shines a greater spotlight on corporate counterparty credit risk. Corporates too have their own concerns about contracting long term with thinly capitalised generators which are SPVs.
Will recent policy developments undermine the growth of the Corporate PPA market in the UK?
The challenges identified above have been joined by some newer and unwelcome developments.
The US experience and some successful PPA programmes in the UK suggest that some of those challenges can be overcome with clear goals, stakeholder buy in, adequate resourcing and solid up front planning.
But the newer phenomenon of shifting regulatory sands in the UK renewables sector and particularly their impact on financing options is increasingly problematic.
It creates added uncertainty and a fear for generators and corporates that allocating regulatory risk in PPAs will be become more complex and the outcome less predictable.
The impact of the embedded benefits review, removal of LECS, solar and wind FIT adjustments and wind-down of the ROCs programme is not only pertinent because of its direct financial impact. Taken in totality it creates an uncertain investment climate and potentially unwillingness of some market participants to enter into long term commitments. Others may be attracted to hedging arrangements because of the uncertainty, but orthodoxy is in short supply.
What drives the corporate agenda? How relevant is “additionality”?
One of the key outputs from the roundtable was the recognition that the corporates' drivers are perhaps more differentiated than might be assumed – and this can have a direct role in unlocking pricing issues.
Larger corporates with sophisticated sustainability agendas may be driven to the Corporate PPA market to ensure power sourced is green. Provision of REGOs through their supply contracts is not sufficient. They require a closer direct relationship with renewable generators – whether physical or synthetic. To source that “additionality” they may be prepared to pay a higher power price through a Corporate PPA.
It was clear that other corporates with less pressing green commitments are not attracted by “additionality” premiums, particularly as the end users’ bill already contains the bottom line impact of the Government’s green policies. For them the longer term Corporate PPA market may not be the right space, other than where it involves private wire.
Network charging and the potential for private wire?
The seemingly inexorable risk in network charges has encouraged the private wire market. Off-grid solutions chime with decentralised developments in storage and energy efficiency. Many of the large US players with sufficient physical space have embraced on site generation. This is clearly a viable model where the elimination of network charges enhances the power pricing options.
Prospects for aggregation?
There was recognition that the market may be moving towards large scale Corporate PPA arrangements. The uncertain bottom line benefits, coupled with complexity and regulatory uncertainty, is often not an attractive environment for smaller players.
Private wire deals, for the right participants, could mitigate that issue. Another potential solution to this problem may be through aggregation models. Aggregation is nothing new in the industry but aggregating a number of small corporates or a number of small generators to access Corporate PPA opportunities is relatively novel. It may dilute risk and reinvigorate this part of the market.
In November 2016 MIT, Post Office Square Redevelopment Corporation and Boston Medical Center signed the largest aggregated renewable energy Corporate PPA in the US to date. The 71MW Dominion Summit Farms PV project will be built in North Carolina. MIT is expected to hedge 40% of its energy consumption under the fixed 25-year Corporate PPA. It was reported that none of the offtakers could have entered into a favourable PPA on their own.
Aggregation with its emphasis on structuring and the bringing together of a diverse set of requirements lends itself to synthetic Corporate PPA models rather than the direct Corporate PPAs (the latter being commonplace in the UK) with their emphasis on a direct relationship between corporate and generator.
Some participants at the roundtable suggested suppliers could take on this aggregation role. Alternatively generators and corporates could form their aggregated groupings.
This was against the backdrop of some comments from investors that suppliers could play a larger role in marrying the interests of generators and corporates. The supplier has relationships with both. The supplier could distil key pricing information into understandable terms for small generators meaning a smoother negotiation process and develop viable pricing models based on the particular requirements of each party.
Aggregation (and its impact in enhancing synthetic Corporate PPA options) is a developing and interesting area and one we will be doing some further work on that we can share with participants.
Future of Corporate PPAs in the UK
For a sustainable Corporate PPA market the barriers identified will need to be unlocked.
Corporate PPAs will not be suitable for all power buyers. But there will be “sweet spots” where certain corporates can align their drivers with a suitable Corporate PPA product.
As grid parity for some renewables technologies becomes a reality this may create better pricing opportunities in the Corporate PPA market.
Private wire deals have good potential and other than physical constraints are a mechanism to counter increasing network and policy related charges.
While utility sourced PPAs continue to be scarce, available Corporate PPAs will exert greater leverage than might otherwise be the case.
Aggregation models may align with the general trajectory of an increasingly decentralised energy market and provide a space for smaller generators and offtakers.