LONDON (ICIS)--Significant demand from corporations with sustainability targets will drive robust activity within the corporate power purchase agreement (PPA) market in the near term, according to Baringa’s Jonathan Roberts in an interview recently conducted by ICIS.
Roberts is a director in Baringa’s energy and resources team, working with corporates, developers and investors to create commercial value and manage risk across the energy infrastructure lifecycle.
PPAs are long-term contracts signed between a renewable generator and a company for the supply of electricity.
A lack of familiarity with delivering PPAs on the part of both producers and buyers may be holding back growth in the market, according to Roberts. Although confidence will grow with time, other restraints such as differences over the ideal length of deals are likely to persist.
Nevertheless, a large number of corporations with sustainability targets are yet to sign a PPA, including some of the largest consumers of electricity.
“The market will keep going,” Roberts said. “I think there will be activity in this space in the short to medium term. Our current experience indicates that subsidy-free PPA projects can deliver annual average cost savings.”
The first six months of 2019 saw 1.2GW of renewable power capacity bought by corporates across Europe, according to ICIS tracking of publicly available deals.
This was marginally less capacity than signed for over the same period in 2018, when just four PPAs in Norway accounted for nearly 80% of the market.
The diversification is not surprising according to Roberts, considering the number of organisations that have pledged to procure 100% of their electricity from renewable power sources. The most prominent initiative is RE100, but many organisations have their own targets.
“If you look at the top 20 energy users in the UK, they’ve all got pretty significant demand volumes and they’re not all meeting them in a 100% renewable way,” he said.
Looking ahead, the rate of growth will increase as renewable producers gain experience delivering PPAs and more buyers gain confidence around risk and exposure to volatility in energy markets. Already, the cost of contracting out trading expertise is falling, according to Roberts.
“There’s no shortage of people willing to manage the element of costs associated with shape, balance and volume,” he said.
Expensive legal and consultancy fees are keeping some potential buyers from engaging in what remains a relatively complicated process, but Roberts believes that the market can quickly develop a blueprint corporate PPA product.
In the meantime, developers are still looking for ways to monetise renewable assets in a subsidy-free environment, while corporates are seeking cost and carbon emissions savings. Both counterparties may gain experience of the risks associated with signing a PPA, but some restraints may not actually ease in the future.
Renewable project developers generally require around ten years’ commitment from a suitable buyer to achieve financial backing for new-build assets.
Many government bodies and private-sector corporations are hesitant to lock in a power supply and price for so long, with significant potential for the buyer to lose out in the second half of the deal.
“All projections suggest that British retail prices are going up in the short to medium term and it’s the right thing to do,” said Roberts. “There’s still a question within corporates of what they’re going to commit to.”
ICIS analysts project prices climbing through 2025 in most European power markets, due to rising carbon prices and coal capacity closures. These are then set to decline in the second half of the 2020s as more renewable capacity comes online and carbon prices soften.
From the generators’ perspective, an adjustment is needed to go from merely winning an auction to achieving a level of technical diligence and certainty that the project will be realised to satisfy the corporate counterparty.
They may simply prefer to sell on a merchant basis, according to Roberts. “The wholesale price of power is spiky and you can trade off that,” he said.
Buyers may be concerned with the long tenor of PPAs, but developers also need to see the counterparty as creditworthy and bankable for the duration of the contract.
Buy less / use less
Roberts discussed corporate PPAs as part of a buy-less, pay-less and consume-less strategy pursued by large energy users to reduce their spend.
• Consume-less initiatives involve increasing energy efficiency and reducing demand where possible
• Buy less involves building generation or battery storage facilities on existing sites held by the corporates
• Corporate PPAs are an example of a pay-less initiative, along with demand-side response
Although the most forward-thinking organisations will be looking at all of these options simultaneously, a PPA is only one of a number of ways to reduce energy spend.
Lack of pressure
Corporations that have signed up to initiatives such as RE100 will go 100% renewable eventually, but the deadline is only 2050 even if individual companies are more ambitious.
Roberts said that executives that see energy spend as one of many line items can get distracted by more pressing concerns, with energy accounting for as little as 3-4% of outgoings in some cases.
“We see a lot of good intentions and strategy, but not following through into implementation because it gets lost in the noise of day-to-day operations,” he said.
“The consequences of not doing it are to be announced. At the end of the day, as an end-user do you care that your consumer products company is 100% renewable or do you just want your item there for you? Where’s the burning platform for corporates to act now?”