Corporate Power Purchase Agreements (CPPAs) are a great way for corporations to get in on the ground floor and guarantee clean energy supply at a predictable and competitive rate.
Simply put, a CPPA is an agreement to trade power at a pre-determined rate. The two parties to such an agreement are typically the renewable power generator selling power and a corporate buying power. Contract length and pricing vary, but typically a CPPA provides the buyer with predictable costs and the seller with predictable income. A third party may be needed if there’s an element of power exchange with the grid, too. That can happen for example where the electricity is not generated on the site where it is being used by the corporate, and excess energy is fed back to the grid.
Renewable power purchase agreements can easily be tailored to a corporate buyer’s needs and constraints, but most PPAs tend to come in one of three core forms explained below.
Private Wire
Perhaps the most straightforward method of renewable energy procurement is through a private wire or ‘behind the meter’ development. Simply put, private wire involves generating renewable energy directly adjacent to where it will be consumed, using a direct connection.
This could take the form of rooftop solar, a ground-mounted solar project in a neighbouring field, a hydroelectric plant on a river, a wind turbine, or some other green energy generation. Optimisation of these projects is often done through co-located battery energy storage systems, helping to reduce intermittency and better match supply to the demand profile.
Ultimately, the consumer will strive to minimise the kWhs that they need to buy from the grid. In some cases, the generation may exceed the demand on site; in this instance, energy can either be stored for later use or, if there is an available connection, sold to the grid.
If the project does need an export connection to the grid, this necessitates applications for export capacity, specialist studies, and structural upgrades to electricity infrastructure on site. This is not only to export any ‘spill’ generation but to ensure the project does not become a stranded asset if the PPA counterparty falls away. The project will also need a right of use for that grid connection for the asset’s lifetime.
While simpler contractually, private wire developments still often require new land agreements, planning permission, and a team of experts to operate and maintain the asset.
Physical PPAs
If the buyer lacks the space to house their own generating asset, they can take advantage of a physical PPA.
A physical PPA, often referred to as a ‘sleeved’ PPA, is a long-term contract where a business (corporate) buys renewable energy directly from a generator, with an energy supplier acting as an intermediary (the ‘sleeve’) to deliver the power through the grid and manage any fluctuations in supply/demand.
The ‘physical’ aspect of a sleeved power purchase agreement refers to power being physically generated at a specific location. While this power could be generated at an existing asset, new assets are often built specifically to fulfil a PPA. This new power being generated for the buyer is referred to as ‘additionality’, and it is a vital aspect of any discussion around renewable power purchase agreements.
For a PPA to be ‘physical’, the power doesn’t have to be generated at the same site where it is consumed. A renewable energy developer may have a solar farm ready to build that matches the buyer’s energy profile, but it is too far away from the place of business/consumption to connect directly.
A PPA allows the corporate to buy this energy at a pre-agreed price via a third-party power supplier. The generator may provide the buyer with Renewable Energy Guarantee of Origin (REGO) certificates to confirm the energy’s green credentials.
Sleeved PPAs let buyers contribute to the generation of renewable energy while hedging their long-term energy costs.
Virtual PPAs
For some buyers, additionality is not a driving issue behind their renewable energy procurement. In this case, a virtual PPA may be the best option.
A virtual power purchase agreement is a purely financial contract where a business agrees to buy renewable energy at a fixed price from a generator. Where it differs from a physical PPA is that no physical power is delivered, or no ‘additionality’ is created.
Virtual PPAs act like a financial hedge, giving the buyer price stability and allowing them to support renewable energy, while the generator sells its power on the open market. As additionality is not required, there is much more flexibility for businesses situated in multiple regions.
The ability to quickly and easily hedge against market fluctuations and price volatility applies to both parties in a virtual PPA. If the generator sells the energy at a higher price than the fixed rate agreed in the contract, the generator pays the difference to the business. If the market price is lower than the agreed price, the business pays the generator the difference.
So which renewable power purchase agreement is best?
When deciding on the best option, a corporate buyer needs to consider all the benefits against potential savings, including a view of the current and future power prices and the costs of either the PPA price or the cost of capital investment in the installation.
‘Off-the-shelf’ (potato stamp) solar farms are often not the optimal solution. The most skilled developers will be able to offer bespoke design (trackers, different orientations, etc) engineering solutions which can be optimised to match the required energy profile. This could involve exploring new technologies, such as hydrogen electrolysers, DC-coupling battery energy storage solutions, and building on capped landfills.
As a fully vertically integrated renewables company, Ethical Power is perfectly placed to deliver complete feasibility analysis for PV and co-located projects. With in-house design, planning, procurement, construction, and grid connections teams, we can advise what type of installation is optimal for the required demand pattern (when and where), what is possible with respect to the likelihood of successful planning applications, and the cost of construction and delivery of the project.
Project ownership can also be structured to suit the consumer’s needs, often involving the sharing of upfront capital costs (development and construction finance) in exchange for cheaper PPA pricing.
To find out more about how to make the most out of a power purchase agreement, get in touch today.