As onsite power becomes the new norm, corporate PPAs are expected to be the preferred choice in enabling corporates to meet their decarbonisation goals while ensuring stable power supply and low energy costs.
While corporate Power Purchase Agreements (CPPAs) are the obvious model for corporates to procure power from Independent Power Producers (IPPs), it’s not always smooth sailing when it comes to negotiating these agreements.
To get a better understanding of the factors that affect negotiations of corporate PPAs, ESI Africa invited industry experts to provide insights and recommendations.
Outlining the global market growth since the emergence of corporate PPAs, Mohamed Rali Badissy, Professor of Energy Law at Penn State Dickinson Law & Senior Advisor on Energy and Finance at the US Dept. of Commerce, attributes the progression to a number of reasons including regulation from policymakers to economic factors that drive corporate decisions.
According to Badissy, the biggest driver of the corporate PPA remarkable growth in the US has been the creation of virtual PPAs, “which are a synthetic form of the typical PPA that is made possible by the deregulation of power markets in the US”. In areas of the US market that are yet to be deregulated, a similar outcome can be achieved through green tariffs, he adds.
Another positive key element that Badissy stressed is that the complexity of the corporate PPAs and overall transaction costs are going down, with deal sizes shrinking as smaller companies, governments and even the military are becoming buyers in this market.
“The boom is a result of policy priorities aligning with economic factors, such that purchasing large volumes of renewable energy under corporate PPAs offers companies both a green PR boost and an effective hedge against rising energy costs,” explains Badissy.
Taking into consideration some of the key elements affecting these contracts, the question to ask is what makes a successful corporate PPA?
One of the key drivers of a successfully negotiated corporate PPA transaction is proper risk allocation, according to Reason Abajuo, Legal Counsel – Power Sector at African Legal Support Facility hosted by the African Development Bank.
Abajuo also points out that the same principle of risk allocation applies – that risk should be allocated to the party best-suited or capable of managing that risk.
“The complexity comes from the fact that a corporate PPA takes different forms, and the risk allocation varies across the different forms. Therefore, a lot of education is needed for parties (corporates and utilities especially) to understand the issues and solutions that exist to resolve these issues,” he says.
A crucial risk is how the PPA allocates the risk between the parties involved for respective non-performance. How can PPAs be used to ensure firm delivery obligations?
In response, Badissy says in some ways the risk of total non-performance is less significant in corporate PPAs because they operate as a layer on top of utility supply. In other words, if the project developer falls through, the corporation can still buy power from the utility, he explains.
Badissy adds: “There are, however, significant risks with variable non-performance with renewables, especially since most corporate PPAs are settled on an hourly basis.”
He simplifies this, stating: “A corporate may be purchasing power to hedge against higher energy costs during peak load hours, but the project may fail to deliver during those hours based on the forecasts that formed the basis of the negotiations. This can be handled with either availability guarantees and/or price adjustment mechanisms to make sure the risk is allocated in a predictable manner.”
If there is a desire to significantly limit the downside and upside variability, corporations can negotiate price floors and/or price collars, where they pay a higher overall price but shift the market volatility to the project developer or the utility, he adds.
“Finally, as the market becomes more liquid, and projects can reasonably expect to sell their output into a healthy wholesale market, the tenure of PPAs can be shortened from the typical 20-25 years. We are now seeing contracts in the US that are only 10-15 years long,” concludes Badissy.
Benefits of corporate PPAs
Responding to a question about the benefits of corporate PPAs, Abajuo says it depend on the party involved. Generally, though, corporate PPAs for renewable projects would help achieve sustainability targets.
Abajou lists the following benefits for all stakeholders:
- For a corporate buyer: Corporate PPAs help to protect the business from the challenge of grid reliability. Power outages are common in most countries where there is potential for growth in CPPA transactions. For corporate buyers in these markets, CPPAs will help ensure reliability of supply. CPPAs can also help corporate buyers reduce energy costs. With solar PV cost decline and grid tariff increase, signing a CPPA may be a cheaper option for the corporate buyer. With a net-metering arrangement, the economics of the transaction would be improved for the corporate buyers. CPPAs also enable the corporate buyers to focus on their core business and shift the responsibility of installing and operating the power project to the developer.
- For a developer: There are challenges with signing an on-grid PPA. The creditworthiness of the utility, administrative delays, and uncertain policies may make it more convenient for the developer to directly negotiate with the corporate customer.
- Finally, for a utility: Corporate PPAs may lead to avoided investments in distribution infrastructure and reduction of line losses.