Corporate PPAs and how they differ from private-wire arrangements: Explained!
With the renewables market in the midst of what appears to be an ongoing run of bad news (closure of FITs, Capacity Market suspension, Targeted Charging Review…) the term "corporate PPAs" is often bandied about with trend-bucking optimism. Increasingly seen as a way to improve the viability of power projects financed without the support of Government subsidies, corporate PPAs – or, more specifically, corporate and industrial power purchasing agreements – are becoming increasingly common.
However, much of the commentary surrounding corporate PPAs is directed to those corporate and industrial (C&I) entities with very large-scale offtake requirements and well-resourced energy procurement teams; the Amazons and Googles of the world. This presumes a certain level of sophistication in energy management that medium-to-large C&I entities do not have, or frankly, need.
This article will take a step back to deal with the fundamental question of "What is a corporate PPA?" and explain how it can be distinguished from the forms of PPA with which many medium-to-large C&I entities will be more familiar: utility PPAs and private-wire agreements.
What is a corporate PPA?
A corporate PPA is any agreement made directly between a generator and a corporate or industrial (C&I) offtaker for the purchase of power.
As a category this captures a wide range of legal relationships relating to the purchase of power. When used in the context of financing or developing an energy generation project, it usually refers to an agreement whereby a large corporate entity purchases power from a generator which is located at a site different to that of the corporate purchaser. If a C&I entity purchases power from a generator which is located at the same site, that is usually referred to as a "private-wire" arrangement.
Why enter into a corporate PPA?
The reasons for entering into a corporate PPA vary. In some instances, price will be the motivating factor. But more often than not, a corporate PPA provides security of supply at a competitive price for a longer period than the spot market offers. Also, when the source of electricity is renewable, it offers an opportunity for the entity (known as an offtaker of the power) the opportunity to demonstrate its environmental credentials. For the generator, where Government subsidies had previously provided a predictable long-term revenue stream, a corporate PPA gives that generator an element of known revenue.
What types of corporate PPAs are available?
The main differences in corporate PPAs arise in relation to the way in which the contract addresses the fact that the offtaker and the generator are located at different sites. This means the generator is connected directly into the electricity distribution network and not to the offtaker (unlike a private-wire arrangement – see below). Broadly speaking, corporate PPAs address this in one of two ways:
- "Sleeved" corporate PPA
A sleeved corporate PPA provides a way in which the parties can buy and sell the power produced by the generating asset where the generator and the offtaker are on the same network, but not in the same place. This means the generator and the user are in the same local distribution network (e.g. both with Western Power).
Under this approach, the generator and the offtaker enter into a power purchasing agreement. The offtaker agrees a price with the generator which relates to the power generated by the relevant asset. An electricity supplier/ utility is appointed as the intermediary between the generator and the offtaker. The corporate PPA will also deal with the entitlement to any renewable energy certificates (or other benefits).
The offtaker and the electricity supplier/ utility then enter into a separate back-to-back power purchasing agreement. This back-to-back PPA will often mirror the majority of the provisions from the original PPA so as to ensure there is no conflict or additional risk introduced by having a sleeved corporate PPA structure.
The generator sells its power to the offtaker who then sells it to the electricity supplier/ utility. The electricity supplier/ utility manages the delivery of that power from the electricity distribution network to the offtaker and sells the power back at the final offtake point, charging the offtaker a sleeving fee. The generator receives the agreed power price from the offtaker.
This type of corporate PPA is often used in the UK.
2. "Synthetic" corporate PPA
A synthetic corporate PPA does not require the involvement of the energy supplier. It is a purely financial structure with no physical delivery of power. This means it provides more flexibility with its structure than a sleeved PPA, but usually means it is more complex.
Under this approach, the generator enters into a standard PPA with an electricity supplier/ utility at the spot price. In parallel, the generator and the offtaker enter into a separate synthetic corporate PPA incorporating a "strike price" at which the parties are looking to fix the cost of the power as between themselves. The synthetic corporate PPA then operates as a financial hedge (whether as a contract for difference or option) where, depending on the spot price at a given time, the generator or the offtaker will pay the other the difference between the spot price and the strike price.
A synthetic PPA is a financial derivative, where the parties agree that they will pay each other a balancing payment so each party should receive the agreed financial result.
What is the difference between a corporate PPA and a private-wire PPA?
In contrast to corporate PPAs, private-wire arrangements are more commonly entered into by medium-to-large (and even small) sized C&I entities. Private-wire, or "behind-the-meter", arrangements are commonly used where those C&I entities are located on land adjoining energy generation assets. The assets generate power which is delivered directly to the offtaker, and not via the electricity distribution network.
Power can be sold directly from generator to offtaker, often at a price well below the market rate.
Private-wire arrangements tend to be less complex than corporate PPAs. This is because private-wire PPAs relate to power moving directly from the generator to the offtaker and therefore are unlikely to need complex price balancing arrangements (given there is no spot price interaction)
What are the common pitfalls in corporate PPAs and private-wire PPAs?
There are common pitfalls in agreeing the terms of power purchasing agreements that will apply regardless of whether you are dealing with a corporate PPA or a private-wire PPA. Contracted supply, outages, maintenance, metering arrangements and pricing all need to be considered closely to ensure both parties achieve the intended commercial outcome, balance risk appropriately and apportion liability. With any supply of electricity arrangements, it is essential to navigate the regulatory framework and care must be taken to ensure the arrangement is compliant.
What is the difference between a corporate PPA and a utility PPA?
A utility PPA, or power purchasing agreement with an energy supplier, differs both a private-wire and corporate PPA. A utility PPA is the most common form of PPA, whereby a generator enters into an agreement with an energy supplier/ utility for that energy supplier/ utility to purchase the power generated by that asset. The contract will provide that the generator delivers the power to the electricity supplier/ utility where the generation project physically connects to the electricity distribution network (or for certain, larger generation projects, the national transmission network). These forms of PPA are in in standard form for most energy suppliers, and all but the largest generators find it difficult to obtain any movement on the terms of these PPAs from their energy supplier counterparties.
What opportunities are there for Corporate PPAs with medium-to-large C&Is?
For medium-to-large C&I entities which are looking for a way to improve their green credentials, and support renewable energy uptake in the UK, renewable energy-backed corporate PPAs may provide an interesting route for the future.
As it stands, offtakers are limited by the offering of energy suppliers.
However, the opportunities for corporate PPAs for medium-to-large C&I entities will depend on how the market addresses some of the key concerns of generators, funders and offtakers, including:
- Counterparty covenant strength: naturally any person looking to fund a power generation asset will look at the ability of that asset to generate income. The funder will need to be sure that the corporate offtaker has the financial wherewithal to satisfy its payment obligations to the generator for the full term of the corporate PPA.
- Term: those corporate PPAs currently being agreed in the market to secure income for new-build generation assets tend to have a term of 10+ years. For any corporate entity this is a long period, and the directors will need to consider whether it is in the best interests of the offtaker to do so – taking a view on future of power prices over that period.
We expect in the longer term for there to be increasing opportunity for engagement by medium-to-large corporate and industrial businesses with the corporate PPA market, as renewable energy subsidies fall away and generators look for alternative revenue streams to secure funding. Whilst this may end up being a slow process, medium-to-large corporate and industrial businesses would be well advised to keep their eyes open to the opportunity that these contractual structures present for energy procurement.
The Michelmores Energy team has experience advising on a range of PPA structures and would be happy to discuss how corporate PPAs, private-wire arrangements or utility PPAs may work for your business.