Impact of CfDs on PPAs: What energy buyers need to know.

When setting a route to market strategy for new to earth wind and solar projects, developers must often choose between a Contract for Difference (CfD) and Power Purchase Agreements (PPAs). 

The government recently increased the frequency of CfD auctions to one per year, with the goal of procuring more renewable capacity secured on the auction. What’s more, the maximum prices available in the CfD have now increased for most technologies.  

The question, then, is how this might affect the corporate PPA market. 

Read on to learn more about the CfD, its impact on corporate renewable energy sourcing in Great Britain, and the considerations that energy buyers should make as a result if they are interested in a corporate PPA (cPPA) for their business.

A brief overview of the CfD 

The Contracts for Difference (CfD) scheme was established in 2014 to support the UK’s journey to Net Zero. It is designed as a mechanism to support investment in clean energy projects.   

As part of this scheme, the companies who are developing or investing in renewable energy sites are provided with a fixed price for each MWh of electricity a site produces and sends to the grid. This fixed price stays in place for 15 years.      

The scheme has been hugely successful, and has helped support the deployment of a significant volume of renewable capacity since its launch.

A quick outline of corporate PPAs 

A corporate PPA is a long-term contractual agreement between a business/energy buyer and a renewable energy generator.  

As part of this contract, the business purchases energy from the grid that has been generated from one or more renewable sources, at an agreed price for a significant term, for all or a proportion of energy consumption across their business.

How might CfDs affect the corporate PPA market?  

Developers have to choose between different markets when deciding on the investment case for any one particular project.  

Investors and developers will often favour long-term fixed prices which help to create revenue certainty. This leaves them with the CfD or a cPPA as the two main options to support project financing.   

Whether developers favour a CfD or cPPA will often depend on several factors, including price, the contracting party, and access to inflation escalated pricing. The CfD ticks two of these boxes, as contracts are linked to CPI, and are government backed and so will often be favoured by investors, but only at the right price. 

Depending on how much renewable capacity the government is looking to procure, the CfD price may be higher than a benchmark cPPA market price. Combined with the attractiveness of the CfD, this could lead to capacity being removed from the cPPA market. 

However, the CfD is a highly competitive auction across multiple technologies and only takes place once a year, so comes with its own set of risks.  If the CfD price is expected to clear at a relatively low level, projects could return to the cPPA market. 

So until the CfD auction takes place (May to June), investors have a choice to make over which of these routes provides the best value for their project.  Projects will still be available in the cPPA market, but the price may be impacted by expectations of outcomes in the CfD process.

To summarise… 

Alongside wholesale electricity pricing and equipment pricing, CfDs can also cause a considerable impact on corporate PPA offers. 

This means that energy buyers wishing to purchase clean energy via PPAs should be aware of the annual CfD auction, as outturns in CfD pricing can affect the supply of new renewable projects, which would otherwise be applicable for corporate PPAs. This has the potential to drive prices due to lack of supply.   

If you’d like to discuss any of the above in more detail, don’t hesitate to reach out! Our team at Innova have extensive knowledge and experience in the PPA market, with our fingers never lifting from the pulse of trends and updates in the sector.  

We also have a significant pipeline of solar projects for PPAs here at Innova that we’d be glad to speak with you about. Simply get in touch with us and we can arrange a time to meet with you.  

Author: Andy Peyman