Corporate power purchase agreements (cPPAs) and the development of bespoke renewable generation solutions are fundamental to supporting the drive towards a net zero grid, while also allowing corporates to demonstrate their contributions to a greener world.
But, as with just about everything, it’s not as simple as it should be. Too often conversations around cPPAs are mired in scepticism and misconceptions. This should be easier than people are making it out to be, what’s the problem?
Before answering that question, a little bit about myself. I’m Nick Evans, a financial analyst at Ethical Power. Having marketed projects to prospective corporate PPA buyers since 2021, I’ve seen the appetite for PPAs fluctuate in the UK’s evolving power market and economy.
It will be interesting to see what lengths the new government will go to over the next four years to enhance the bankability, accessibility and availability of corporate PPA and renewables schemes. I am not a trained salesman, but I’ve developed a talent for rolling with it despite the steep curve.
So why the misconceptions surrounding cPPAs? Simply put, corporate buyers often aren’t energy experts. In fact, few people are.
Even fewer will be entirely right about the future shape of energy markets. Policy and economic environment will give good steer, but it’s impossible to predict the future, and even the best-laid plans are often at the mercy of shifting tides.
If you’d like a refresher on some of the core concepts and terminology I will be discussing, you can click below to read our handy guide on PPAs.
Corporate Considerations
Corporate energy procurement strategies of the past have been, by comparison, relatively straightforward. A corporate could reach out to licensed suppliers and move forward with the most reasonably priced deal they find. These would often be hedging in 6-month blocks (summer/winter) for one or two years in advance.
The jump to a much longer-term hedge offered by a cPPA may therefore seem unfamiliar and riskier. The temptation to hold out for better pricing can be paralysing, and the concept of deviating from the normal might be unattractive to risk-averse businesses.
Considerations beyond risk and economics include eco-consciousness and ESG commitments. Several hundred corporates have signed up to an initiative called the RE100, which strives for its members to work towards achieving zero carbon energy grids by 2040.
Additionality, which stipulates that the PPA is the genesis of (or a significant contributor towards) new renewable generation, is key to this. It is therefore required that RE100-qualifying PPAs must be from generation that currently does not exist, which brings construction risk into the consideration of their energy procurement strategy.
A buyer is unlikely to be enticed by a project without planning permission or a secured (near-term) grid connection, while project developers may want to bring about these conversations at the first available opportunity.
The question of CfDs
In the current price environment, a corporate will need strategic drivers over and above cost savings to motivate finding a cPPA. Lacklustre buy-in seen in the UK market is primarily caused by the cost of the next best alternative from both sides. Relatively low wholesale prices of electricity through 2024, and being seen in the market today, have meant that corporate buyers can demand lower pricing. Conversely, the annual CfD auction has provided renewable generators with 15-year, government-backed, index-linked, price security.
A nefarious cycle has emerged whereby prospective corporate buyers have been led down the garden path by project developers, who then leave the corporate at the altar when they win a CfD.
Consultants and advisors have caught up to this too. There has been a reluctance to engage in conversations during the CfD process, making cPPA procurement an almost seasonal exercise. So, following the release of the CfD results every year, chaos ensues. It remains to be seen how well this observation will age. However, it is fair to say that I have been invited to bid on many more PPA requests for proposal (RFPs) in the past 6 months compared with the months leading up to AR6 results being published.
In many respects, for a corporate buyer looking to secure fixed energy pricing from new-build generation, there is something of a race on. Particularly to meet their own bullish net-zero targets. Near-term renewable energy projects that have a grid connection, secured land agreements, and planning permissions are limited in supply.
So CPPAs are too complicated then?
They don’t have to be. Sluggish uptake of cPPAs has been largely associated with concerns around associated complications. The game of smoke and mirrors developers and corporates play ought to be put to bed.
The right developer and project can instil confidence in a corporate buyer and demonstrate the business case. If commercial alignment can be reached on price and structure, complexity can be diminished with good guidance and a rational approach.
What gives me the confidence to assert that CPPAs shouldn’t be difficult is that we have experience making them work. In April 2024, Lynher Energy, Ethical Power’s joint venture with Napier Park, signed a 15-year physical PPA with a UK-based FTSE100 company. We designed, and are currently constructing the 27MW Twitch Hill Solar Farm. Once energised, the project will also be looked after by Ethical Power’s Operations and Maintenance team.
As the developer and EPC, ICP and O&M contractor for our own projects, Ethical Power is also in a unique position to negotiate corporate PPAs. Whereas most generators will have to balance the negotiation of the PPA contract against what the project’s contractors are prepared to accommodate, Ethical Power can handle this all in-house. We approach our corporate clients with ready-to-build projects and can make a proposal quickly following initial contact. Being able to provide the off-taker with every piece of the puzzle in one place made the process much simpler, and quicker.
From there, there is no reason why negotiation of the contract should be as drawn out as they seemingly so often are. Negotiating PPAs is straightforward, business as usual for the Ethical Power team.
If you’d like to speak with our team about cPPAs or other power procurement options, click the button below and send us a message.