By Angus McCrone
Chief Editor
Bloomberg New Energy Finance
Over the last decade, there have been many developments in clean energy that have excited companies and investors. Some, like algae-based biofuels and the Clean Development Mechanism, have faded. Others, like electric vehicles and renewable power auctions, have justified the hype.
One of the latest hot topics in the sector is corporate power purchase agreements, or PPAs. These involve large companies signing deals to buy electricity from new-build wind farms and solar parks, at a set price and for a set number of years.
For the buyer, such deals offer various advantages. The company concerned may have a sustainability strategy, so buying renewable power fits it; or it may want to lock in a particular electricity price rather than face the risk of future inflation in one of its main input costs; or, maybe, there is a security-of-supply issue and the PPA provides comfort on that. For the wind or solar developer, the PPA provides a guaranteed outlet – and, crucially – a set price, enabling the project to secure finance and go ahead.
Corporate PPAs are a hot topic now because we are now at a point where renewable energy subsidies are fading away and the sector is moving into the era of living purely off the prices it can command for its electricity. And, with extreme uncertainty over realizable power prices, particularly if wind or solar projects themselves are having a depressing effect on prices, something that can provide certainty on revenues is precious.
The figures from my analyst colleagues at Bloomberg New Energy Finance show that new corporate PPAs soared from an average of 500 megawatts a year around the turn of the decade, and almost all of this in the U.S., to a peak of 5.3 gigawatts in 2015. Last year, the global total of new deals slipped a bit, to 4.5 gigawatts, but this was mainly to do with a lull in the U.S., and in fact there was record capacity signed in Europe, Middle East, Africa and in Asia-Pacific.
In all, counting the first quarter of 2017, some 19GW of corporate PPAs have been signed worldwide so far, and among the companies most active in contracting to buy renewable electricity have been some of the biggest names of all – such as Google, Microsoft and Facebook.
There are big hopes being invested in this trend. Namely, that corporate PPAs might spread to a much wider base of companies, medium-sized as well as huge, across all industries – and enable many more wind and solar projects to go ahead than could squeeze into the allocations provided by national auction programs. The effect could be multiplied if activity in the U.S. and Europe pushed competitors in developing economies to follow suit.
It sounds great. But this column exists partly to ask some awkward questions. And the question here is whether the sector might be pinning too many hopes on corporate PPAs: in other words, might this fashionable trend turn out to just that – fashion – and not really a substantial driver of clean energy investment in the medium term?
Some basics
There is no doubt that large companies are paying more attention to the sustainability of their businesses than they did a decade ago. Partly, this reflects pressure from shareholders, a small proportion of which have mandates to invest in companies that meet particular ESG[1] standards. Customers may also feel better about the goods and services they buy if they know they have not damaged the environment by choosing them.
Many firms have targets for reducing their CO2 emissions, often improving their own margins in the process by taking energy efficiency measures. Their next step is to look at the nature of the electricity they are buying. Is it generated from fossil fuels or zero-carbon sources?
When it comes to the purchasing of green power, there is more than one way to skin a cat. In fact, there are at least four. The first is to buy renewable energy certificates, or RECs. These come into being when a qualifying renewable energy plant produces electricity, and can be purchased on the market, in turn providing some extra revenue per megawatt-hour for the project owner.
The second is to agree a green supply contract with a utility. The latter will buy electricity from a range of fossil fuel, nuclear and renewable sources, but will guarantee to its environmentally-orientated customer that the power it provides to it will all be from the green bucket.
The third is for the company itself to buy renewable generating equipment. Most likely, this will be solar panels for installation on warehouse roofs or in the field next to a factory; but it could also be a biomass power plant onsite, perhaps making use of waste matter from the firm’s main business, or it could be wind turbines.
The fourth is the corporate PPA. But this one splits into a category A and a category B. The category A is what is termed a ‘private-wire’ deal, in which the company contracts a renewable energy developer to build a wind, solar or other clean power project nearby and physically to send it electricity down a private cable.
Category B, and much the more common, is an offsite PPA, in which the corporate buyer agrees to purchase a set number of megawatt-hours per year from a green project. The actual electrons received will not be those produced at the renewable energy plant concerned, since the two are likely to be tens or hundreds of miles apart.
Instead, the buyer takes the agreed amount of electricity from a utility at the stipulated price (which will include a charge to reflect the cost of balancing intermittent solar or wind generation), and the utility buys that same amount from the project.[2]
Comparing the options
The various options above all have their advantages and disadvantages. Buying RECs is comparatively simple and does not lock the corporate buyer into a total cost of electricity that could prove in the future to be far above market prices. That is why many large companies with green aspirations chose this approach a few years back.
Signing a green supply contract with a utility is also relatively simple, and again there is no risk of ending up a loser compared to market electricity prices over the medium term. Green supply contracts may be the obvious option in markets where wind, solar and other renewables are supported by a feed-in tariff, for instance much of continental Europe.
The snag with both these two options is: how green does that make you? The corporate customer may be buying RECs, but those RECs were probably on the market anyway, and the project concerned existed anyway. Similarly, with a green supply contract, where is the guarantee that additional renewable power capacity was built as a result of your company’s buying decision?
It is a lot more clear-cut with the third approach, the company setting up renewable energy kit on its premises. The problem here is that the amount of roof space it has, or the amount of unused land on its site suitable for turbines or panels, will be limited. The likelihood will be that this equipment will be able to supply only a proportion of its total electricity needs.
That leaves option four, in its two flavors. The private-wire PPA is in some ways an ideal answer because the contractual arrangement between the company and its nearby supplier of green electricity should be relatively simple, and the purchase price should be free of taxes. On the other hand, the corporate customer will still be dependent on the grid, to provide power when the renewable energy project is not generating enough; and the project owner will have to sell into the market when it is producing more than the client can buy.
The offsite PPA gets around those last two issues, but creates some others. In particular, the contractual arrangement between buyer and project will be complex, involving a utility balancing the supply of renewable power and the demand from the buyer.
The big shots
Many of the biggest companies of all are making loud noises on energy sustainability. A Research Note by my colleague Laura McIntyre, published in January, showed that seven of the top 10 by market capitalization have renewables targets for at least a proportion of their electricity supply by a particular date. Within this group, the approaches differ – Microsoft, for instance, has achieved 100 percent already, mainly through purchasing RECs, although it is now shifting towards other options, while Google is hoping to hit 100 percent before the end of 2017, PPAs having been the largest component thus far. Clients can read that note here, or on the Bloomberg Terminal here.
Individual deals being struck in 2017 continue to be noteworthy. March produced more evidence that these strategies are catching on in many places, with the first disclosed corporate PPA in Burkina Faso, covering a gold mine, and contracts for rooftop solar on railway buildings in both China and India. January saw Apple signing a deal for 235MW, representing the generation of the Techren PV project in Nevada.
Last October, Nick Albanese of BNEF’s U.S. analysis team predicted that 50 American corporations that have already committed to ambitious renewable electricity targets could sign another 17 gigawatts of utility-scale wind and solar PPAs by 2025. A much larger figure, of up to 81 gigawatts, could result if a wider selection of commercial and industrial companies weighed in. Clients can read that note here, or on the Bloomberg Terminal here.
Issues ahead
So the recent trend has been mostly towards corporate PPAs, at least among the world’s largest companies. Fans of the concept, notably developers in countries that are facing a future without any subsidies, think they can see sunny uplands in which large amounts of wind and solar capacity could be built purely on the basis of corporate PPA deals.
This process will accelerate, they argue, as wind and solar costs continue to fall, making it easier and easier to sign a deal with a project developer that is at, or below, the wholesale electricity price. Even companies that are little moved by climate change would start to take notice then.
The U.K. is one of the many markets where developers hope there will soon be unsubsidized renewable energy projects going ahead on the back of corporate PPAs. Statkraft, the Norwegian energy company that has signed some 150 conventional utility PPAs in the U.K. market, told me that it is “actively working with renewable energy developers and corporate off-takers to provide unsubsidized PPAs”, although it added that levelized costs of generation in wind and solar may have to fall a bit further before many corporate buyers take the plunge.
Globally, there are grounds to be a bit cautious about the corporate PPA excitement. One issue is the complexity of offsite PPAs. This will make some medium-sized and even large companies hesitate – their power purchasing departments may be too small to devote many man-hours to complex contracts with developers and utilities.
A second is that company boards are going to think twice about locking into long-term PPAs of any description if they see a chance that power prices will fall in the years ahead. If electricity prices were to slide, it could leave them paying over the odds and at a competitive disadvantage to peers that stayed with floating prices.
There used to be a near-consensus that power prices could only go one way in the future – up, up, up. More recently, that conventional wisdom has shifted, as a result of experience in Europe with generation over-capacity, and in the U.S. with the shale gas boom leading to cheap gas-fired generation. Opinion is now divided between those who expect zero-marginal-cost renewable generation to lead to lower electricity prices in the future, and those who expect coal closures to lead to a snap back upwards in wholesale power prices.
A third issue is that market regulations are still holding back the arrival of corporate PPAs in some countries. These may entrench a monopoly supplier of electricity. Or they may provide feed-in tariffs and other guaranteed prices to renewable power developers, offering no room in the market to corporate PPAs. Or they may be regulations that entrench low and falling wholesale power prices.
A fourth is there may not be enough utilities with appetite to offer the hedges necessary for a greatly expanded corporate PPA market. As it stands, the corporate buyer will take the power price risk, and included in the price it pays for electricity will be an element to cover the balancing of demand and supply by a utility. That utility therefore could be exposed if its estimate of the balancing cost proves to be too low.
In summary, excitement or caution? A bit of both, I would suggest. Corporate PPAs may not turn out to be quite as widely adopted as their biggest fans hope, partly because market forces are likely in the years ahead to produce a fresh array of choices for wind and solar developers to secure their revenues – batteries, aggregators, financial hedges via power price futures, utility PPAs. And green supply contracts may develop as a strong alternative for companies wanting to show sustainability, particularly if utilities can overcome the ‘additionality’ issue.
However, it looks very likely that the energy-consciousness of companies around the world will continue to grow, as the price they pay for electricity (and its greenness, for consumer-facing businesses and their supply chains) become more important influences on competitive performance.
The strongest growth in corporate PPAs may in the end be in those developing countries where the 24/7 supply of electricity is less than assured and power prices are volatile and expected to increase in the future.
This topic will be one of the many discussed at the Bloomberg New Energy Finance Summit in New York next Monday and Tuesday, April 24 and 25. For further details, including the agenda, please go to https://about.bnef.com/summit/event/new-york/
I hope to see you there!
[1] Environmental, social and governance
[2] There is a synthetic version, particularly in the U.S., in which the contract merely obliges the project owner and corporate buyer to settle with each other to the extent that wholesale electricity prices exceed or fall below the agreed PPA price.