BLOG: Corporate PPAs: an alternative route to additionality
On the UK’s path to Net Zero, decarbonising our buildings is a key challenge. In order to succeed, we must all look at how we can procure high quality renewable electricity. Many organisations’ corporate social responsibility programmes have and are recognising this, and are looking at how this can be achieved.
One of the key principles that is driving organisations’ choices in respect of their energy procurement strategies is that of additionality. Additionality in this context means choosing to purchase renewable electricity in a way that leads to the construction of a new renewable energy generating plant that would not have otherwise been constructed. The direct result of the organisation’s purchasing choice is an increase in renewable energy generation and verifiable emission reductions for the business.
On-site and private wire arrangements are a great way for customers to deliver additionality, but the requirement for space on the customer’s site (or on a nearby site) is an obvious limitation.
We have, over the last few years, seen an increased take up in corporate power purchase agreements (“PPA”), but what is a corporate PPA?
The rise of the corporate PPA
In a nutshell, a corporate PPA provides a direct contractual link between customers and generators, irrespective of location. It offers benefits for both the customer and the generator. Typically, a corporate PPA will set a long-term power pricing mechanism (some are for 25 years+) between the generator and customer. This allows the customer to procure renewable energy, whilst also providing certainty and transparency over the wholesale price element of its delivered energy costs. For the generator and its investors, a corporate PPA can provide an attractive, predictable revenue stream.
The first UK corporate PPA deals were completed in 2008, and all the signs are that this market will continue to grow. At Burges Salmon, we have seen the emergence of two main models, the Virtual PPA and the Back-to-Back PPA, which are explained further in Appendix C2 to the UKGBC’s Renewable Energy Procurement & Carbon Offsetting Guidance for net zero carbon buildings.
What can the corporate PPA offer to customers?
In our experience, while many organisations sign corporate PPAs as part of their sustainability or carbon targets, the benefits of price certainty over the long term can also be compelling. Many value the ability to be able to point to the specific renewable energy projects from where they are purchasing their energy. This can be for a number of reasons: supporting local projects (which could be community owned), or being able to show stakeholders (including customers, investors, funders, tenants) specifically where energy is being purchased.
Whilst we have seen the Government’s welcome policy of opening up eligibility for Contracts for Difference to a broader range of technologies than in recent years (including onshore wind and solar projects), not all projects will be successful in each auction round. However, a corporate PPA with a creditworthy customer can offer an alternative route to market. Crucially in the UK’s journey to Net Zero, where a customer enters into a corporate PPA with a project under development, a corporate PPA can underpin the financial model for new generation plant and show verifiable additionally for the customer.
Alongside this, a corporate PPA can also provide additional advantages for customers, including:
- having a significantly wider market available for the purchase of electricity;
- ensuring that the licensed supplier continues to take the supply and balancing risk – the customer’s lights will not go out if the generator suffers an outage; and
- enabling the customer to spread its exposure to pricing fluctuations by agreeing a fixed (or bespoke) pricing mechanism with the generator. This can complement the pricing arrangements under the customer’s existing electricity supply agreement and be part of the customer’s energy price hedging strategy.
Download UKGBC’s new Renewable Energy Procurement & Carbon Offsetting Guidance for Net Zero Carbon Buildings here