Bird & Bird: Corporate Energy Consumers Go Green

Bird & Bird has launched the 2019 revision of its report on International Corporate Power Purchase Agreements (PPAs), now covering over 17 countries across Europe and Asia Pacific.

Elizabeth Reid and Sophie Dingenen, co-heads of Bird & Bird’s Renewables Group, spoke to Clean Energy Pipeline following the latest update of the report, Corporate PPAs: An International Perspective. The two partners discussed the recent developments and potential areas of new growth in this dynamic market.

The Corporate PPA market has doubled in size over the last two years and 2019 is on track to surpass the record set in 2018, in which 121 corporations purchased a record 13.4 GW of clean power directly from renewable energy generators, as outlined in the revised report.

Tech giants such as Google, Apple, Amazon and Microsoft were the preeminent force in establishing a viable marketplace for corporate offtake arrangements in the clean energy sector, but recent years have seen a broad range of industries entering the fray for renewables.

The report also analyses and discusses an ever-evolving set of challenges for corporates, generators, developers and investors.

‘Perfect storm’

Public transportation, telecommunications, food and beverage, mining and chemical companies are all responsible for underpinning billions of dollars’ worth of renewable energy projects under construction today.

Reid and Dingenen pointed to a ‘perfect storm’ of factors pushing corporates to switch the source of their long-term energy consumption towards renewables.

“The first is pressure being applied upwards – from consumers,” Reid said. “2019 has borne witness to a surge of public sentiment demanding action on climate change. Corporates have responded to this by updating and renewing their pledges to be more sustainable and minimise their impacts on the environment.

“This is most prevalent in consumer-facing corporates such as in the retail and tech sectors.”

Finding price certainty

Dingenen continued: “The second is pressure being applied from above and from within – by the directors and shareholders of corporates, added.

“The 2008 financial crash and ensuing recessions forced firms to find new and innovative ways of achieving financial security. Corporate PPAs are long-term agreements (sometimes 15 years+) and provide price certainty for both the corporate and the generator by using fixed or cap/floor pricing structures.

“Straining under the weight of these two pressures, Corporate PPAs offer a pressure release valve for corporates to achieve their green energy goals and achieve some financial certainty.”

For renewable energy generators, the rise of Corporate PPAs has, in part, been necessitated by the decline of state-backed remuneration for clean power across many jurisdictions, especially among the more mature global power markets, causing a loss of floor price for power.

“Lenders and investors to projects are usually reluctant to take ‘merchant risk’ on a project, meaning generators need to seek a long-term fix/floor revenue stream from an offtaker,” said Reid.

“Utilities are usually not willing to give a long-term fix or floor price (they are not set up to hedge risk in this way), so generators are approaching corporates directly for this.”

“Finally regulatory sweeteners such as the recast Renewable Energy Directive (RED II) have been introduced,” Dingenen added.

“The RED II includes ambitious drivers for the uptake of Corporate PPAs in Europe including a binding EU-wide 32% renewables target for 2030 and an enabling framework for the uptake of Corporate PPAs. RED II also requires Member States to assess the regulatory and administrative barriers to Corporate PPAs and to remove unjustified barriers to, and facilitate the uptake of, Corporate PPAs.”

“Sleeved” and “Synthetic” models

Navigating the terrain of Corporate PPAs is full complexities which vary from region to region. Bird & Bird’s latest report emphasises the opportunities and threats facing corporate consumers and generators in today’s clean energy market, while also dissecting the leading offtake contract structures available, including ‘sleeved Corporate PPAs’, which is the dominant model in Europe, and ‘synthetic Corporate PPAs’, the preferred contract structure in the US.

“The US boasts the world’s largest Corporate PPA market,” Reid stated. “The catalyst for this growth has been a combination of green tariffs for larger energy consumers and adoption of aggregation models for smaller energy consumers.

“Aggregation models allow smaller corporates to club together to pool their offtake requirements and ‘aggregate’ their demand. The result is an ‘economies of scale’ approach which empowers smaller corporates to gain a foothold in the market. This approach, in part, saw new market entrants be responsible for 31% of the total Corporate PPA activity in the USA in 2018.”

“Second to the US, the European Corporate PPA market has continued to blossom and has seen impressive growth particularly in the Nordics,” she continued.

“Norway and Sweden in particular have spearheaded use of Corporate PPAs, underpinned by their robust wind power industries.
“For example, in Sweden, wind energy production is expected to double in the next four years to 40TWh. Corporate PPAs have tapped into this market with Norsk Hydro signing a ground-breaking 29-year Corporate PPA for 1.65 TWh wind power per year with Green Investment Group in 2018.”

Market and regulatory barriers

Outside of the Nordics, Europe remains relatively undertapped as far as the widespread adoption of clean energy Corporate PPAs is concerned.

“In Western Europe, market and regulatory barriers have slowed the uptake of Corporate PPAs, but as these begin to fade we have witnessed, and expect, growth in countries like Spain, Italy, Germany and France,” said Dingenen.

“For example, in Germany, amendments to the Federal Renewable Energy Act in 2017 resulted in lower reference prices being set for wind/solar generators, whilst market prices for energy continued to rise. Corporates responded with a renewed interest in Corporate PPAs and in January 2019 Mercedes-Benz signed Germany’s first Corporate PPA. Whilst Germany was late to the party, they are now, it seems, global advocates of corporate PPAs.”

She added: “Eastern Europe is another area primed for an increase in use of Corporate PPAs. In Hungary, for example, the KÁT system required renewable energy generators to sell energy exclusively to the Transmission System Operator (TSO).

“On the corporate side, companies were able to buy certificates of origin to prove their use of and commitment to renewable energy. However, in January 2017 a new system – METÁR – was introduced. The new system requires new renewable energy projects above 0.5MW to conclude PPAs with offtakers. As the KÁT system begins to fade out, renewable generators will be exposed to market volatility and we expect them to turn to Corporate PPAs to mitigate their risk.”

The 2019 version of the Corporate PPAs: An International Perspective report can be downloaded here.