This article considers both the benefits and considerations of negotiating and signing a Corporate PPA directly with a renewable energy generator.
What is a corporate PPA?
A corporate power purchase agreement is a long-term contract under which a business agrees to buy some or all of its electricity directly from a renewable energy generator. This differs to the traditional method of purchasing certificate backed renewable electricity directly from a licensed supplier and is often considered a more direct and authentic way of for electricity buyers to purchase renewable power.
What are the benefits of a CPPA?
The benefits of purchasing energy directly from a renewable energy generator are numerous and form two distinct types:
- Greater budget certainty and insulation from high energy costs , PPA prices can be fixed for up to 20 years
- Meaningful impact on scope 2 emissions and CSR reporting as PPAs provide high levels of traceability compared to REGO backed power
What should buyers consider?
Volume Requirements
This will largely depend on the size of the consumption involved and how much of this volume the business is willing to commit. The larger the volume the bigger the asset will be required to meet it. When negotiating their first PPA, most businesses typically commit 20-50% of their consumption (although this will vary from company to company). Buyers might want to factor in future uncertainties in consumption as this can affect the terms of the PPA.
PPA Length
Typically, most deals are between 8 and 15 years in length. This provides the long-term revenue certainty the generator needs to obtain financing to build and maintain the project. The buyer will also benefit from long-term price certainty although they will need to be aware that power prices might outturn differently to that of PPA price during the contract, although this can sometimes be managed through clever pricing structures and floors.
Pricing Mechanism
There are several pricing mechanisms which can be deployed within a PPA and the pricing structure chosen will ultimately be determined by the requirements of investors of the generation project and the amount of risk the buyer is willing to take on :
- Fixed with or without indexation – simple fixed £/MWh price throughout the duration of the PPA. The price is typically linked to a measure of inflation such as the consumer price index (CPI) to ensure the value of the PPA is not adversely impacted by inflation.
- Cap and Collar – A floor price mechanism is included within the PPA to ensure that the developer receives a minimum price to make the project financially viable. A ceiling is also in place to ensure that the buyer does not pay above a certain price to help with budget certainty.
Stakeholder engagement
It’s incredibly important to consider the impact that a PPA will have on the wider business. Depending on which structure is agreed it will have a huge bearing on a wide range of business functions from procurement to finance.
Agreeing a long-term fixed price is often outside the business horizon and will require specialist sign off from the CFO or Finance Director and it’s extremely important that the board are engaged before, during and after the PPA is signed.
Aligning the stakeholders early will result in a much more efficient process, with both financial and time saving benefits for the buyer and developer.
Development Risk.
This concerns any issue arising from the development of the project. This could be anything from failing to secure a grid connection or issues with the connection agreement, through to failing to obtain (or delays in achieving) planning consent as well as construction delays. Buyers can mitigate this risk by selecting projects with grid and planning secured, known as shovel ready, but there are only a limited amount of such projects on the market.
Investing in renewable energy through a corporate PPA can support energy buyers with both their sustainability and financial goals. At Novus we have large pipeline of pre-construction solar sites and the experience and expertise to support buyers through every step of the process. We make sure they are aware of the issues and support them to mitigate the risks. Get in touch with a member of the team to find out more.