PPA for Offtaker - Corporate PPA

Corporate Power Purchase Agreements (Corporate PPAs) are long-term contracts between the owner of a renewable energy plant (RE plant) and the end-consuming offtaker for the delivery of 100% green electricity and the corresponding Energy Attribute Certificates (EAC). The electricity can be delivered virtually (Virtual PPA) or physically (Physical PPA). In addition, the delivery can be realized through a direct-cable-connection between RE plant and electricity-consuming asset (On-Site PPA) or via public grids (Sleeved PPA). These contracts are the best option for corporates to fulfil their climate targets. However, they are more complex to structure, are not available in every energy market, and some types may induce negative effects on the offtaker’s balance sheet.

 

 

Corporate Power Purchase Agreements at a glance

 

Corporate Power Purchase Agreements (PPA or CPPA) are defined as direct agreements between an electricity-consuming corporate (so-called “Corporate Offtaker”) and a Special Purpose Vehicle (SPV) holding the renewable energy assets and which is owned by a developer or independent power producer (IPP).

Corporate PPA – Basic Structure   Source: Think RE GmbH, © Think RE GmbH

 

PPAs are procurement contracts covering the physical or virtual delivery of renewable energy and are commonly structured as long-term contracts. Besides the delivery of renewable energy, these agreements also provide Energy Attribute Certificates proving the origin for every contracted MWh from a specific plant under the PPA. The EAC price is commonly bundled in the total PPA price.

 

Pro and Contra Corporate PPAs

 

PRO Corporate PPAs   CONTRA Corporate PPAs
  • Potential electricity cost savings with no up-front capital costs
  • Long-term electricity cost stability and predictability
  • Enables new renewable electricity project to be developed
  • Ability to purchase large volume of electricity through a single transaction
  • Customer engages directly with a specific project, which can be desirable
  • Customer can negotiate specific terms of the contract
  • Potential naming rights to renewable electricity project
  • Independent Power Producer is responsible for project’s operations and maintenance
  • Allows non-profit organizations to take advantage of tax credits through third parties
 
  • Largely restricted to customers located in competitive electricity markets
  • Risk of fixing PPA prices above market prices for a long-term period
  • Availability of off-site PPAs limited to customers with large electricity loads and investment-grade credit
  • Customer must ensure EAC ownership in order to make green power claims
  • May not have same financial benefit of outright ownership

 

Different Corporate PPA Types

A Corporate PPA can be either realized onsite or offsite. In the first case, it means that the renewable energy plant is directly located on the offtaker’s site and directly connected to the electricity-consuming offtaker assets. The latter case means that the electricity produced is sold to the grid, gets mixed with energy outputs from other power plants, and then gets delivered to the offtaker. 

 

1. Onsite PPA

Onsite PPA – Basic Structure   Source: Think RE GmbH, © Think RE GmbH

Onsite PPAs are characterized by a direct cable connection between the electricity-consuming entity and the renewable power plant. The graph shows the situation of a Corporate PPA which is contracted with a Special Purpose Vehicle (SPV) not owned by the offtaker itself since otherwise there would be no Corporate PPA but only an Intercompany PPA closed for accounting reasons.

The SPV owner normally has rent the site for the entire project lifetime. The agreed PPA price does not include grid fees etc. making Onsite PPAs normally cheaper to comparable volumes delivered over grid-based solutions. However, since the plant is not connected to the public grid and is outside of the transmission system operator’s responsibility, there are normally no Energy Attribute Certificates being delivered to the offtaker. The offtaker very often must treat these PPAs as leasing contracts (e.g. under IFRS 10) in the corporate accounting since the offtaker is normally proactively involved in the development process of the renewable energy asset.

Therefore, Onsite PPAs induce the risk that the PPA might affect the offtaker’s balance sheet and corresponding financing covenants. Onsite PPAs were by far the most contracted Corporate PPA category in the last decade. However, their application remains limited due to the scarcity of qualified sites. Consequently, larger volumes are commonly contracted under Offsite PPAs which became the predominant Corporate PPA category in terms of installed renewable energy capacity.

 

2. Offsite PPA

Offsite PPAs are defined as direct agreements between a developer or independent power producer and the Corporate Offtaker by using the grid and therefore, balancing responsible parties for transporting electricity from the supply side to the buy-side. Under these PPAs, the created EACs are allocated from the SPV to the offtaker. This can basically be realized based on two fundamental Offsite PPA types: Physical PPAs that include the physical delivery of renewable electricity and Virtual PPAs which are only a financial hedge against volatile power market prices.

 

2.1 Physical PPA

Physical PPA – Basic Structure Source: Think RE GmbH, © Think RE GmbH

A Physical PPA is defined as a contract containing the physical delivery of the contracted renewable energy volume delivered by a third party (utility or energy trader) via the public grid. The contract covers the delivery of a certain fixed or variable amount of renewable energy under a specific PPA price mechanism.

The PPA price normally also includes the price for ECS which are delivered under the Corporate PPA (bundled EAC). The Balancing Responsible Party (utility or energy trader) physically receives the renewable electricity output. In case the balancing responsible party also receives electricity parties other than the SPV (e.g. from fossil fuel plants), it could be the case that the electricity delivered to the offtaker is “grey” as described in the chapter “Grey Power Markets”.

However, the sustainability is still proven since the EACs received can track the origination of the renewable energy back to the specific SPV. In addition, the renewable energy plant is often build only because of this agreement, so the offtaker can directly influence that a new renewable energy asset gets online fostering the energy transition. Due to the necessity of integrating a Balancing Responsible Party (BRP), there is often a so-called Balancing Agreement closed between the BRP and the PPA counterparts which covers the exact process of physically delivering electricity. Depending on this contract, only one party or both parties can pay a balancing fee.

 

2.2 Virtual PPA

In contrast to a Physical PPA, a Virtual PPA does not contain a physical delivery between the SPV and the offtaker. It is a financial hedge purely based on the electricity price. Consequently, these agreements are commonly only applicable for offsite solutions due to the absence of the physical energy delivery. Assume that the electricity price P1 is the current price on the day-ahead market. This market price is used as the underlying of the Virtual PPA which is called Settlement Price. In addition to defining the settlement price, both parties agree on a so-called strike price which serves as a benchmark and which is fixed during a certain period of time (PPA tenor). There might be three scenarios:

Scenario 1: Settlement Price P1 > Strike Price

In this case, the SPV would earn more than allowed because it agreed together with the offtaker on a strike price which is lower. In order to stick to the agreed price, the SPV has to compensate the offtaker by paying the difference between P1 – Strike Price.to the offtaker.

Scenario 2: Settlement Price P1 < Strike Price

In the case, the offtaker would consume electricity to costs lower than allowed under the Virtual PPA. The SPV would earn less than it is allowed to earn under this contract. Consequently, the offtaker has to pay the difference between Strike Price – P1 to the SPV.

Scenario 3: Settlement Price P1 = Strike Price

In this case, nobody has to compensate the counterpart since the contract is already settled.

 

Virtual PPA – Basic Structure   Source: Think RE GmbH, © Think RE GmbH

Virtual PPAs are very famous since they are relatively simple in their structure compared to Physical PPAs.

However, things become complicated if the SPV and the offtaker are located in separate countries or in other energy markets. In this case, the settlement price in both countries may differ from each other which is called Basis Risk and which has to be handled by every PPA counterpart itself.

The described price structure is also known as Contract for Difference (CfD) since only differences are exchange between the parties. Note that there are other price mechanisms applicable under Virtual PPAs such as Floor, Cap or Collar. 

Analogous to the Physical PPA, EACs are delivered under Virtual PPAs as well and the EAC price is also normally bundled in the strike price. In the last years, especially the number of closed Virtual PPAs strongly increased in various electricity markets since it is a relatively simple but reliable tool for procuring EACs and prove the corresponding climate footprint management.

 

3. Fixed Volume PPA

How many EACs are delivered under a PPA depends on the particular volume structure of the PPA, i.e. whether the offtaker receives a fixed amount of electricity (so-called Fixed Volume PPA) or a variable amount (so-called As Produced PPA). In case of a Fixed Volume PPA, the number of EACs delivered equals exactly the fixed electricity volume delivered. In case the power plant produces an energy output lower than the contracted fixed volume, the SPV has to buy the outstanding amount of electricity and of certificates on the secondary market.

 

Fixed Volume PPA   Source: Think RE GmbH, © Think RE GmbH

From the offtaker perspective, a Fixed Volume PPA could be most often the preferred volume structure since it delivers predictable volumes that can be better matched with the own electricity consumption.

However, there are two major risks inherent with fixed volumes:

A – Market Price Risk:

Because the producer side bears the volume risk and the corresponding costs, the PPA prices are normally higher compared to As Produced Structures. Since PPA prices are commonly fixed for a long-term period, this higher PPA price could lead into a competitive cost disadvantage for the offtaker compared to its competitors who might buy their electricity at costs below the PPA price. This risk becomes more pronounced for energy intensive sectors like datacenter providers, aluminium manufacturers etc. 

B – Accounting Risk:

If the price and the volume are fixed, PPAs might require derivative accounting (e.g. according to IFRS 9). In this case, offtakers need to consider mark to market accounting resulting into a more volatile profit & loss account depending on the price development at the electricity market.

 

4. As Produced PPA

Contrary to the Fixed Volume PPA, the SPV has to deliver all EACs for the output produced in case of an As Produced PPA. The subsequent graphs summarize this relationship for this PPA type which is often preferred by independent power producers.

As Produced PPA – Basic Structure   Source: Think RE GmbH, © Think RE GmbH

However, the offtaker bears the risk that the SPV does not deliver the expected energy output. In case of underproduction, the offtaker has to purchase the deficit volume to market prices from the intraday electricity market.

Consequently, there are also two major risk among others inherent with As Produced PPAs:

A – Market Price Risk

Assuming a fixed PPA price, the market price risk is related to the difference between the amount of electricity consumed and the amount of electricity delivered under the As Produced PPA. The more renewable energy is connected to the grid, the lower the market prices and vice versa. Therefore, the probability of buying deficit amounts to high market prices is highest when the probability of underproduction is high. Offtakers are exposed to pay market prices higher than the fixed PPA price in case of underproduction. Therefore, prices for As Produced PPAs are commonly lower compared to Fixed Volume PPAs since the offtaker bears the market price risk related to deficit volume amounts.

B – Volume Risk

As Produced PPAs always induce the risk that the offtaker does not receive the electricity volume necessary to maintain its business activities. In this case, the offtaker has to purchase the deficit amount to variable market prices. Offtakers normally manage this risk by building a diversified procurement portfolio consisting of several contract types across different renewable energy technologies.

 

Commercial Summary for Corporate PPA Types

The graph below summarizes the PPA price structure and compares the different PPA types according to volume risks.

PPA Price Structure    Disclaimer: The prices shown in the table do not imply any acceptance, advise, or endorsement by Think RE GmbH.

The profile costs charged by the SPV for the shape risk are related to buying missing electricity volumes. This deficit induces liabilities which must be financed either by equity or debt capital. In the latter case, the SPV normally has bond lines from which it can draw the necessary liquidity.

For these draw downs, the banks charge interest rates which are understood as liquidity costs for buying deficit volumes at market prices. Since the volume risk increases with increasing PPA ticket sizes, the absolute liquidity costs are increasing accordingly. If the liquidity is provided by equity, the liquidity costs can be understood as the return rate required by investors.

In sum, the main advantage for electricity consumers like corporates or public institutions (e.g. hospital, university) is the direct influence on their sustainability and climate strategy. Moreover, the offtaker is able to ensure that a new renewable energy plant can get online to the grid solely due to the offtaker’s own electricity consumption.

Finally, these contracts may induce a potential for saving electricity costs if they are structured appropriately and the underlying renewable energy projects show a high quality. However, these contracts cannot be realized in every country and are strongly depending on the availability and quality of available renewable energy projects.

Global Overview of Corporate PPAs   Disclaimer: The countries shown in the table do not imply any acceptance, advise, or endorsement by Think RE GmbH.    Source: Think RE GmbH, © Think RE GmbH

 

 

According to the International Renewable Energy Agency (IRENA), the estimated annual amount of renewable energy volume allocated under Corporate PPAs accounts for more than 120 equalling 1.9% of the annual total renewable energy production.

Corporate PPA markets are continuing to show the largest growth rates among the different ways to procure green energy.