9 May 2024 • 12 minute read
Unravelling the Potential of Corporate Power Purchase Agreements (PPAs)
What is a Corporate Power Purchase Agreement (CPPA)?
If your objective is to pursue a “dark green” type energy tariff described in the previous article due to its favourable business case, considering a Corporate Power Purchase Agreement (CPPA) could also be a viable option. This is particularly attractive for businesses seeking enhanced traceability and market value by directly procuring energy from renewable sources.
As set out in the previous article, the traditional approach of procuring electricity from licensed suppliers or opting for a pre packaged “dark green” energy tariff carries the inherent risk of variable fees and the complexity of researching and managing switches.
As an alternative, a CPPA is in effect a bespoke tripartite arrangement between i) the project developer responsible for electricity generation, ii) a licensed utility company that secures electricity from the generator and “sleeves” the electricity generated into the supplies it physically delivers; and iii) the end user (or offtaker) who receives the electricity. The CPPA will usually be with the utility company (who will have a back to back agreement with the generator), with the offtaker paying for the cost of electricity delivered and a sleeving fee to the utility company.
Depending on the size of the portfolio, a CPPA can be used for a single site, or a commercial landlord could enter an agreement as part of a ‘bulk supply’ to multiple offtaker sites. Opting for a CPPA will provide for a long term arrangement, where the duration will typically be between a minimum of two to three years and a maximum of ten to 15 years.
Set out below is an overview of the advantages and disadvantages of opting for a CPPA compared to a standard supply agreement:
CORPORATE POWER PURCHASE AGREEMENT |
STANDARD SUPPLY AGREEMENT |
| Advantages | Advantages |
| As a bespoke agreement, it can be tailored to the landlord’s exact requirements. This includes a preference on the renewable source and to tailor to the properties’ characteristics such as particular planning permission requirements. | Generally straightforward, non negotiable supplier terms and conditions, with lower professional costs involved. |
| Can help to achieve a “gold standard” in best ESG practice because of transparency and accountability for the green energy supplied. These agreements also contribute to developing renewable projects. | Bipartite arrangement between the corporate buyer and the supplier only. No involvement with power producer. |
| There has been an increase recently in “24/7” CPPAs, providing the corporate buyer with real time monitoring and reporting to track the environmental benefits of the energy generation which can be disclosed to tenants and investors round the clock. |
Generally no minimum offtake requirement. |
| Can be valuable for marketing to tenants if they value direct green energy procurement. |
No credit support required due to smaller risk for counterparties. |
| Via the sleeving arrangement, the utility company is responsible for bearing any risk in fluctuations in the wholesale market power price. This acts as a de risking mechanism for the corporate landlord. |
A standard “dark green” tariff will still boost ESG credentials and marketing value to attract investors and tenants |
| If there is a shortfall in the supply of energy generation, the utility company takes responsibility for purchasing any top up renewable energy from the market. |
Much easier to reassess energy needs and switch suppliers ie next day. More varied choice in suppliers (please see previous article). |
| The agreed upon price is often at a discount (compared to the open wholesale market) particularly if it is a ‘bulk supply’ and/or is a longer term CPPA. | |
| The long term arrangement can provide for budget certainty as the price per unit can be fixed from the outset of the contract. | |
| Disadvantages | Disadvantages |
| Bespoke agreements will take longer to negotiate, and incur higher legal, financial and technical fees and considerations. | Usually offer only limited customization options which may not suit the specific needs of a corporate landlord. |
| The tripartite nature can add complexities, as the corporate landlord will need to deal with requirements of generator and utility company. | Do not directly contribute to developing renewable energy projects, so not generally considered to be ESG “gold standard”. |
| There may be a minimum offtake requirement. For example, a ‘take or pay’ arrangement where the off taker either “take” and pay for a specified volume of energy, or “pay” a predetermined amount even if they do not take delivery. This is to give assurance to the generator that they will receive payment. |
Whilst guarantees of origin may be provided which can evidence the type of renewable resource used to generate electricity consumed, there is unlikely to be the level of transparency and granularity as a CPPA. |
| Generators/suppliers will often ask for credit support (via a parent company guarantee, letter of credit or cash deposit) to reduce the risk of failure for the overall PPA if one party defaults. This may cause problems if the corporate buyer is not part of a group with the required credit rating or does not have arrangements with a bank capable of providing a letter of credit. Offtaker must consider associated fees with this request. |
Potential risk of accusations for greenwashing, especially if a “light green” tariff is chosen (please see the previous article). |
| There is no guarantee that the price achieved will be less than that potentially obtained under a wholesale supply agreement “dark green” tariff. Certainly, it will not be less than a “light green” tariff. |
Less potential marketing value to tenants. |
| Must consider whether pursuing the “gold standard” is really worth the time and cost in agreeing a CPPA. Must balance investor/tenants ESG preferences and marketing potential. |
The shorter term nature allowing suppliers to change prices upon renewing a contract, which can expose corporate landlords to market fluctuations. |
| The long term nature means less flexibility to change terms and switch to a different energy generator. |
Usually a wholesale price will be agreed (subject to ‘bulk buy’ opportunities). |
|
Exposure to market fluctuations. Ability to ‘shop around’ can create less certainty in financial planning. |
How do I decide if a CPPA is right for me?
Hiring an energy broker is highly recommended to carry out a cost/benefit analysis on whether a CPPA would be right for you. They will also be able to connect you to the appropriate generator and utility company.
If you own multiple sites, it is advisable to assess whether entering into a CPPA to supply energy for some or all of your locations would be beneficial, potentially leading to cost advantages through “bulk” discounts.
We can assist you in resolving any issues related to CPPAs and answer any questions that you may have.