Corporate Power Purchase Agreements - Irish structures and issues
Globally, Corporate Power Purchase Agreements (cPPAs) have become one of the most common means for renewable energy projects to achieve long-term price security with corporates buying renewable energy/renewable energy certificates from the generator. In Ireland, cPPAs are an increasingly viable alternative to the Renewable Energy Support Schemes.
These arrangements are beneficial to both parties. For generators, cPPAs with financially strong counterparties, by providing long-term stable income, give the financial certainty needed by them to obtain the debt financing to build new facilities. For corporates, there are a variety of different reasons to source power from renewables, including providing additionality and obtaining guarantees of origin (GOs). The potential to secure fixed cost electricity is also a major factor, particularly given volatile market prices.
Although the original instigators of cPPAs were high energy using data centres, the desire to enter cPPAs has not been limited to particular types of companies or geographical areas. Large banks, oil majors, retailers, restaurant chains, IT, pharma, telco companies and service providers have all widely published details of their cPPAs. Indeed, DLA Piper recently signed its own cPPA with NextEnergy Group relating to the energy generated from a 13MW new build solar farm in the UK. It is the first law firm anywhere in the world to undertake a cPPA with power equivalent to the power used in DLA Piper’s 15 European and UK offices.
Structures – Physical or Virtual
There are two main types of cPPAs in use in Ireland being, virtual PPAs which largely follow the structure used elsewhere and physical or sleeved PPAs, the typical structure for which must be adapted for the Irish market.
Physical PPAs involve delivery of power to the corporate which is facilitated by a utility. In Ireland, the mandatory nature of the Single Electricity Market and the requirement to have a supply licence to act as an intermediary for a generator alter these arrangements somewhat, however, it has been possible to develop structures to address these issues.
Virtual or synthetic cPPAs are financial contracts for differences and are typically settled by reference to the Day-Ahead Market price with settlements based on the volumes produced by the generator’s asset. Under these arrangements the generator and the corporate will each maintain separate arrangements for the sale and purchase of physical power.
Internationally, corporates also use private wire PPAs, however, the high bars imposed by the Electricity Regulation Act 1999 mean that they are not currently used in Ireland. It is hoped that this will change following the review under the Climate Action Plan.
In all cases, the generator will transfer the GOs for the power generated to the corporate.
Two of the issues which DLA Piper sees arising on cPPAs, including in Ireland, are volume risk and negative pricing.
Under a utility PPA, a generator will receive reduced payments if its output is lower than expected. However, given the desire to lock in energy prices, certain corporates require the generator to assume further volume risk. In these cases, if generation is lower than agreed thresholds, the generator may have to pay liquidated damages. These clauses are often heavily negotiated and can include carve outs for grid issues or FM events.
Negative pricing occurs periodically in the SEM markets. Corporate offtakers may not want to pay the fixed price to the generator at these times allowing them to take advantage of the negative pricing. Floor prices may also be included. In such arrangements, for synthetic PPAs, no payments are made between the parties for times of negative pricing, however, they will each still be subject to separate physical contracts for power generated or consumed. For physical PPAs, the SEM arrangements are such that any power generated will be the responsibility of the registered intermediary (which may be the corporate or a supplier providing a pass through). To address this, parties frequently include provisions allowing the corporate to notify the generator and require it not to generate in relevant periods. If a generator still does, it often accepts the financial consequences of disposing of the power at negative prices.