Corporate energy users are increasingly viewing a corporate PPA as a workable option for their energy needs and an important component of their overall risk management strategy.
Active participation in energy markets
Corporate PPAs are large-scale, long term power purchase agreements with renewable energy generators, which enable corporates to take control of their long-term energy needs.
“The uptake of PPAs represents a marked shift in the willingness of corporates to actively participate in energy markets.”
Previously corporates would procure energy needs via a competitive tender process. A corporate PPA however, can involve a direct, long-term relationship between the consumer and the generator.
Corporates already benefiting
Examples of corporates who have already entered into PPAs include:
- Financial Institutions
- Local Governments
- Technology businesses
- Retail businesses
- Educational institutions
- Manufacturing businesses
- Agricultural businesses
Economic drivers
Each corporate will have its own motivations for entering into a corporate PPA, but the most common drivers noted are:
- Significant increase in electricity prices and green product prices,
- The desire to hedge against energy market volatility
- Achieving greater budget certainty (as corporate PPAs offer long-term price certainty)
- In-house sustainability targets
- The falling cost of renewable energy generation
Corporate PPA contracting models
There are a number of different renewable energy PPA contracting models, as well as pricing models that can be used.
Contracting models broadly fall into one of the following three categories:
Unsleeved PPA
Also known as a 'synthetic' or 'virtual' PPA is a financial derivative or contract for difference under which the parties agree a fixed price that is settled against the spot prices in the National Energy Market (NEM). There is no physical supply of electricity to the corporate from the generator so the corporate will need to procure its electricity needs from the NEM or a retailer.
Sleeved PPA
Also known as a 'physical' PPA is where the corporate’s retailer bundles the output of the corporate PPA with the retailer’s provision of electricity to the corporate; thereby integrating the two.
Behind the meter PPA
Is a PPA where the renewable generator is installed behind the meter at the corporate’s site and directly supplies the corporate’s load, offsetting consumption that would otherwise be procured from a retailer.
Other considerations
Other structural and resourcing issues that a corporate will need to consider include:
Bundled pricing, LGC only or electricity only
It is possible to enter into a PPA for LGCs only or electricity only or bundle both. The long term nature of PPAs require the corporates to take a long-term view of electricity spot market prices and LGCs.
Single buyer or multi-buyer
If a corporate’s load size is large enough they can contract as a single buyer, but if not, corporates are increasingly “pooling” together to form a buying group to aggregate their loads. A special purpose vehicle may be formed to formalise the group. Risk allocation and governance are key issues for buying groups.
All or partial load
Corporates can choose to contract for 100% of their consumption to fully hedge exposure to price increases and energy market volatility or part only.
Term
Potential tensions between corporates who generally prefer to contract for shorter periods (e.g., 5 years) and project proponents who prefer to contract for longer periods (e.g., 10-15 years).
Resourcing
The corporate will need to ensure that they have the appropriate personnel and resources (eg IT systems) to manage the administrative requirements associated with the PPA.
Contact our experts should you need any assistance or more information on PPAs.
