The growing market for corporate power purchase agreements provides an array of new revenue contracting structures for operational assets
With the closure of the early renewable support schemes (such as the Feed-in-Tariff and Renewables Obligation) many asset owners are now considering offtake strategies for projects nearing the end of their subsidy period. The evolving corporate power purchase agreement (CPPA) market continues to introduce contracting options that may prove attractive to owners of renewable generation projects.
Corporate PPAs: for life, not just for newbuilds
Historically, CPPAs were the preserve of newbuild assets. The concept of "additionality" has often been a requirement of corporate environmental, social and governance (ESG) strategies and, to satisfy this requirement, corporate buyers have needed to demonstrate that their entry into a CPPA directly contributed to the development of a new renewable generation project. Contracting for renewable power from an operational asset would fail to satisfy this aim. As a result, corporate buyers have generally shown a preference for contracting in respect of new projects rather than those already in operation.
In a different vein, certain asset owners have found greater value in contracting unsubsidised projects under shorter-term arrangements, particularly where financing commitments do not require a project to lock-in long-term revenue arrangements. Accordingly, the typical 10-year term of a CPPA is at odds with the risk-reward balance sought by those asset owners who favour pricing agility over price certainty.
We are now also seeing corporate buyers willing to offtake from operational assets on shorter contract duration. Driving this change are the twin factors of the requirement to achieve fast approaching corporate net-zero goals; and a desire by buyers to navigate price volatility through shorter term commitments. Entry into a shorter-term (that is three years) CPPA enables a corporate buyer to demonstrate its progress towards internal ESG targets and/or requirements. Equally, entering into shorter-term CPPAs may prove equally appealing to those asset owners seeking constant and predictable returns who have historically considered the longer tenor of a typical CPPA to be too restrictive.
Strength in numbers
The developing trend towards adopting multiple-party structures also opens up new contracting opportunities for asset owners. There are two emerging approaches of particular note:
- The portfolio CPPA. Under this arrangement, a
single corporate buyer contracts with a portfolio provider, who
provides the buyer with power from a portfolio of projects. In
doing so, the portfolio provider seeks to match the consumption
needs (for example, any or all of volume, balancing, shaping and/or
time matching) of the buyer from a range of renewables projects.
The portfolio provider will need to do the heavy lifting to align
intermittent output with the buyer's demand profile. Given the
historical generation data that they can provide, operational
projects are often favoured by portfolio providers for
participation in such arrangements.
- The multi-offtake PPA. Under this arrangement, a single seller contracts (either directly with or via a principal for the on-sell to) a number of corporate buyers whose individual consumption needs are each less than the output of a single project. As such, corporate buyers can access a product that might not be suitable to them on an individual basis and asset owners can increase the pool of corporate buyers with whom they can contract. That said, this approach is more complex to paper and, to the extent the asset is financed, asset owners may find it more challenging to get lenders comfortable given such complexity and the relative novelty of the approach.
Streamlining the process
While these new approaches point to an increase in complexity in CPPA contracting, in one area, at least, the maturation of the PPA market has brought a streamlining and simplification of contracting approaches.
In Great Britain, a market that has to date seen only a limited adoption of CPPA standardised terms (such as the European Federation of Energy Traders template), standard forms are now becoming more commonplace, in the forms now deployed by large energy users. Many corporate buyers have introduced accelerated power procurement processes, which typically involve contracting on the buyer's standard terms. Signing up to these standard terms may reduce contracting complexity for asset owners, which may appeal to those deterred by the upfront cost of negotiating CPPA terms with an inexperienced buyer. However, asset owners may consider a lack of contracting flexibility to be the trade-off for such simplicity.
Osborne Clarke comment
The growth and development of the CPPA market provides asset owners with an array of new revenue contracting structures. For those projects coming to the end of their subsidies, an exciting world of corporate contracting now awaits.
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