A greener energy future through Corporate PPAs
by Daniela Fitzpatrick, Origination & Offtake Manager, ScottishPower Renewables
Onshore wind is the cheapest form of renewable energy in the UK that can be deployed at scale, but to do so it needs a route to market. In lieu of Government-backed support mechanisms, the industry has turned to Corporate PPAs as a solution to enable investment into onshore assets.
So, who is signing up to Corporate PPAs and why? Buyers of green energy are demonstrating their commitment to play their part in addressing the climate change emergency. Sustainability of supply chains is a key issue. Business models the world over are reliant on a climate that functions and is not subject to fire, flood or drought. Risk registers should reflect the need for sustainability of the supply chain to protect long term shareholder value.
For many companies, carbon footprint is increasingly a focus as part of their wider Corporate Social Responsibility strategy. This is often driven by consumers and shareholders becoming more aware of climate change risks. Many large corporates are also beginning to require sustainability from their supply chain and PPAs are a way that the vendor can remain compliant with current, and future, customers.
Regulation is driving greater transparency – for example the UK Companies Act (2006) requires listed companies to report on their carbon emissions. There is also a global trend for companies to produce non-financial reports on their activities and to be seen as leading the way on environmental issues. Finally, many customers are exposed to price volatility in the wholesale market, with current retail products only enabling them a short term price fixing solution. Some of these customers, who are not necessarily looking for Green credentials, are turning to Corporate PPAs to price fix for a longer term hedge on their energy costs.
The main risk preventing developers from building onshore assets is the uncertainty on future returns from the wholesale market. Renewables are not alone in this – traditional generation faces the same issue but has the security of long term capacity market contracts. Corporate PPAs can achieve the same thing for Renewables, and present a mutually beneficial solution to both customer and developer.
The PPA market is still in its infancy in the UK and while we see an increase in number of buyers demanding green energy, the buyer can tick the “green” box far more easily by way of a REGO deal – buying REGO certificates from existing renewable generation. However, we can see a movement towards the support of “additionality”, adding new green energy plant to the grid, and these customers are dictating far more in terms of the size and timing of projects.
Why haven’t we seen a barrage of publicity surrounding newly signed PPAs in the UK? One reason could be that negotiations and agreeing commercial positions can be complicated, and considering the change in risk profile for both buyers and generators, it is easy to see how negotiations could stall. The main features to be considered are around project delivery, price, volume, term, shape, credit and finance, and both developers and customers need to give careful consideration as to their commercial position early in the process, and agree key commercial terms upfront before delving into the nitty-gritty of a full contract.
The focus of developers has had to change in this new, more commercial market. Previously, developers would focus on timelines driven by support mechanisms and project construction programs. Now, the focus has shifted away from the developer timeframe in favour of meeting customer programs. As the industry has matured, developers are required to optimise the projects to compete on cost with others, and it is only the most cost-competitive sites which will win the few available PPA opportunities.
So how can the PPA industry in the UK move forward and start to pick up pace? PPAs can be delivered in many different ways, meeting many different requirements: physical; virtual; sleeved; supply; as generated; baseload, to name a few. No two PPA contracts will be the same, however, there is a need for a more standardised approach to the PPA market, to enable contract negotiations to run more smoothly, producing industry standard terms in dealing with key risks and commercial areas. This would facilitate the delivery of more signed PPAs whilst providing much needed support for smaller developers and buyers looking to contract via a CPPA. Perhaps a roadmap on how to make the PPA procurement process easier would be beneficial to the industry and would provide a greater understanding of key issues – which are all solvable – without re-inventing the wheel each time a new contract is considered.