Corporate Power Purchase Agreements (PPAs): What are they?
A Corporate Power Purchase Agreement (Corporate PPA) signifies a lasting agreement where a company commits to procure electricity directly from an energy producer. It is a variant from the conventional method of buying power from licensed electricity providers, often termed as utility Power Purchase Agreements.
Such organized arrangements offer financial predictability for utility firms and the constructors, eliminating a substantial hurdle to funding and establishing new renewable facilities. Consequently, Corporate PPAs play a pivotal role in integrating more renewable energy into the grid.
In an era where numerous nations have trimmed or entirely withdrawn subsidies for renewable energy, a Corporate PPA becomes indispensable for a financially robust counterparty, thereby, instrumental in achieving a "bankable" renewable energy project. Through Corporate PPAs, businesses not only source energy but also contribute to the broader transition towards renewable energy.
Power Purchase Agreement structures
There are three typical contract structures for the corporate PPA:
- Physical PPAs
- Synthetic PPAs
- Private Wire PPAs
A Physical PPA signifies a durable agreement where a business, often known as the corporate off-taker, enters into a prolonged arrangement (typically exceeding 10 to 15 years) with a renewable energy generator. This entails accepting some or all energy produced by the generator's facility or plant network at a predetermined price per MWh.
This PPA outlines provisions for electricity sale and purchase, allocation of applicable renewable energy benefits (like green certificates), and regulations governing the transaction. It's important to note that in most cases, the delivery of renewable energy is notional.
In certain regions, including the UK, these agreements also necessitate the provision or acquisition of certain metering and regulatory operations that can only be performed by licensed electricity providers. Consequently, in these countries, the corporate off-taker needs to sign a back-to-back agreement with a licensed supplier, who commits to fulfilling these obligations.
Alongside this arrangement, in many jurisdictions, the corporate off-taker will have an electricity supply agreement with the licensed supplier, which ensures electricity provision to meet the corporate off-taker's energy demands intermittently. The terms of this supply agreement consider the electricity procured under the PPA and channeled to the licensed supplier under the supplier agreement. This arrangement guarantees that the corporate benefits from the fixed pricing for renewable energy under the PPA while maintaining the reliability of an ongoing supply agreement with a licensed electricity supplier for its everyday energy requirements.
A Synthetic PPA operates differently as no physical power is traded. Instead, this agreement functions through a derivative contract structure. Here, the corporate off-taker and the renewable energy generator establish a pre-determined 'strike price' for the energy generated by a renewable energy facility.
Each party will then form separate agreements with their electricity supplier or utility to sell or acquire (as applicable) electricity at the market spot price. This agreement acts as a financial hedge: if the market spot price during a settlement period exceeds the strike price set in the PPA, the generator pays the difference to the corporate off-taker for the power generated in that period. Conversely, if the market price for power falls below the strike price during a settlement period, the corporate off-taker pays the deficit to the generator for the power generated in that period.
Therefore, Synthetic PPAs allow corporations to support renewable energy projects and secure a stable energy price, without physically trading power.
Private Wire PPA
Private Wire PPAs deal with the direct sale of electricity from a generator to a corporate off-taker. Unlike a Physical PPA, in a Private Wire PPA, power is typically sold straight from the generator's facility to the corporate off-taker, bypassing the traditional national power grid.
In this model, the energy-generating facility is typically located at or near the corporate off-taker's assets and usually supplies power exclusively to the off-taker. Private Wire PPAs are commonly utilized in scenarios where the corporate off-taker seeks to secure its independent power source—for instance, for factory operations or off-grid locations—or in regions where the grid system's reliability is questionable.
Thus, Private Wire PPAs serve as a practical solution for businesses desiring control over their energy source and supporting the growth of localized renewable energy.
Global Relevance of PPAs
Corporate PPAs are becoming increasingly relevant globally. While these are well-established in markets like the US, UK, and Scandinavia, developers and corporate off-takers are continually exploring new jurisdictions for their implementation. Recent conversations have extended to locations such as Spain, Portugal, Romania, and Japan, among others.
This growing adoption by large, renowned corporations, investing in their own generation assets, is driven by the economic and environmental advantages offered by Corporate PPAs. Originally spearheaded by high-energy-consuming data centers, the interest in Corporate PPAs has transcended specific company types or geographical locations. From large banks, oil majors, and retailers to restaurant chains and IT and telecommunications firms, a wide array of businesses are publicizing their PPAs, driven by concerns over their carbon footprints.
At DLA Piper, we possess first-hand experience of the mutually beneficial scenario these Corporate PPAs provide. We have offered counsel to lenders, developers, and off-takers on their PPAs—from energy generators and their financiers to corporate end-users and their licensed electricity suppliers. We have been involved in numerous prominent European Corporate PPAs in recent years.