Understanding the Corporate PPA Landscape
by Fiona Wilson
July 28, 2022
For those working in current day energy finance, Corporate PPAs are an essential project structure to understand. Many of you who have been following Pivotal180’s content are probably familiar with traditional Power Purchase Agreements, or PPAs. These PPAs are typically signed between a Project Company (or Independent Power Producer/IPP) and a utility who serves as the offtaker. The Project Company sells electricity generated by its power plant to the utility for a fixed price over a set period (usually 10-30 years), and the PPA details the terms of that agreement. So, what is a Corporate PPA?
Corporate PPAs are a type of Power Purchase Agreements, but the offtaker (buyer of the electricity) is not a utility but instead a company that requires power for its own operations. It is an electricity consumer, but its core business is not electricity generation, transmission, or distribution. The term “Corporate PPA” can cover a range of project structures, but typically refers power produced off-site from the corporate’s facilities, rather than a project built on site, like rooftop solar at corporate’s offices or factories.
In recent years, corporate PPAs have been growing in prevalence and relevance in electricity markets and economies. BNEF reports that 2021 was a record year for corporate renewable energy buying through PPAs, with 31.1 GW purchased (a 24% increase from 2020 figures, and nearly a 50% increase compared to 2019 figures). Almost two thirds of the capacity from these corporate contracts is attributable to deals in the United States, where technology companies dominated the corporate PPA sector. In North America, tech companies accounted for over 60% of capacity in PPAs signed in 2021, and were similarly dominant in Europe, accounting for just under 60%. In both 2020 and 2021, Amazon was the single largest clean energy buyer globally, with 44 PPAs announced last year. Microsoft and Meta follow Amazon among leading buyers in the corporate PPA sector.
Corporates’ motivations for signing these kinds of agreements range from technical/operational factors to economic drivers to ESG (Environmental, Social and Governance) goals. For example, some markets around the world have unstable electricity supply from utilities and the risk of blackouts or curtailment presents a major operational challenge to corporate facilities; these corporates may seek a more stable power supply through a long term PPA with an IPP who can reliably deliver electricity. In other markets, corporate offtakers may be drawn to PPAs to hedge against the volatility of retail electricity prices or because they can achieve a lower cost electricity supply through a PPA. Just as importantly, many companies are signing renewable PPAs to improve their ESG ratings, reduce their carbon footprints, and meet their renewable energy targets. These corporates may have made public commitments (through organizations like RE100 or others) or need to comply with regulatory requirements. Renewable Energy Certificates or Credits (RECs) from renewable energy projects are typically passed on to the buyer in a PPA, which is another draw for corporate offtakers.
Corporate PPAs are therefore another avenue to encourage renewable energy development and secure finance for clean energy projects. Similar to traditional PPAs with utility offtakers, corporate PPAs provide projects with a stable long-term cash flow that facilitates financing for the project. The contractually fixed price over 10-30 years allows the project to seek debt or other finance for the project, and package risk in a structure attractive to investors. Similar to contracts with utility offtakers, the credit risk of the corporate offtaker is a major factor in the bankability of the corporate PPA. A lender to the project will carefully consider the corporate offtaker’s financial stability and expected sustainability in the market before lending to the project, so large and financially robust corporates are ideal offtakers.
Another unique feature of corporate PPAs that differs from traditional, utility offtake PPAs is that corporate PPAs may not involve the physical transfer of electricity! Virtual Power Purchase Agreements, or VPPAs, are a growing (and now dominant, in some markets) subcategory of corporate PPAs. In a VPPA project, the project and corporate will agree on a fixed price for a fixed volume of energy, but the project will sell in its local electricity market and the corporate will continue to purchase electricity from the grid, with an unchanged relationship to its local utility. For context, VPPAs accounted for 12 GW of the total 17 GW of PPAs announced in the US in 2021. If you are curious about VPPAs and want to learn more about how these projects work, look out for Pivotal180s content on Alternative Revenue Structures for Wind and Solar projects.
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