The evolving landscape of corporate PPAs

Power Purchase Agreements (PPAs) are increasingly becoming a key consideration for businesses. Our recent blogs explain what a PPA is, the various options available and how they can be an important element of sustainable energy procurement. This article delves into the history of Corporate PPAs, how they have developed in recent years and the emerging trends that are likely to influence how the PPA market may evolve further.

A brief history of Corporate PPAs

While PPAs have been commonplace between generators and utilities for decades, even before the development of renewable energy, with which they are now more commonly associated, Corporate PPAs only emerged in Europe during the late 2000s. Initially uptake was slow and deal making momentum only really started to build as Net Zero ambitions at board level began to align with demand for longer-term protection against market volatility.

Growth in PPA capacity by year

While growth in the PPA market has been impressive, particularly in recent years, it’s important to note that the majority of deals are still being struck by a relatively small number of companies. Big tech firms, including Google, Amazon and Microsoft, have led the way with Corporate PPAs and these 3 alone represent ~30% of the European capacity contracted in the last decade. This highlights that while the renewable sector is growing rapidly and ever more energy is available for corporates to contract directly, there remain significant barriers to entry, particularly for smaller businesses.

PPAs underpin investment in renewable energy projects, leading to an increase in zero-carbon generation on the grid, an attribute known as additionality. This makes them a powerful component of any Net Zero strategy, with more direct environmental impact than some other measures, such as procuring renewable energy certificates alone, which typically support existing rather than new projects. PPAs can also form part of an effective long-term energy hedging strategy, offering price security and protection from the market volatility that has become increasingly prevalent since 2021.

As PPAs have become more established, the market has started to develop a range of more standardised products that corporates can access, including physical and virtual structures, fixed and market-indexed pricing, baseload and as-produced supply. However significant challenges persist when it comes to implementing a PPA and as yet there is no ‘off the shelf’ product available, in the way that there is for standard grid supply.

Key considerations include:

• Technical risks relating to the renewable asset; unlike standard grid supply, PPAs normally carry some degree of risk relating to the performance and reliability of the generation plant.

• Complexity in sourcing a suitable project and negotiating terms, both of which can involve substantial legal and due diligence costs.

• Managing volume and price risk; corporates will typically require a sleeving and balancing partner (such as their energy supplier) to enable a physical agreement. Increased market volatility has had a knock on impact on the shape and risk fees that may be involved in delivering PPA volumes.

• Financial recognition (virtual PPAs can be considered a reportable derivative) and reconciliation of generation and sleeving statements.
  
  

Emerging trends in the PPA market

Energy markets are rapidly evolving to optimise for the opportunities and challenges presented by renewable energy generation and PPAs are following suit. Generators, aggregators, suppliers and corporates are working together to create ever more flexible structures that remove some of the barriers for entry that so far have often proved too great for all but the largest companies.

Corporates now have a range of options that make PPAs more accessible, such as indirect agreements, where the contract does not have to be struck with the generator directly and often removes much of the complexity around asset performance and volume risk. Shorter-term PPAs and contracts that deliver renewable energy from a portfolio of projects, rather than a single source, offer further flexibility.

Looking to the future, this pace of innovation is set to continue. Hybrid PPAs are beginning to emerge, which enable renewable generation assets to be co-located with battery storage systems, enhancing revenues by delivering energy during peak periods of grid demand. In Europe, cross-border PPAs take advantage of interconnected power markets to enable corporates to access generation across the continent. And relatively small energy consumers now have opportunities to secure renewable energy through multi-party PPAs, which aggregate the demand from a group of buyers.

How can Amber support your PPA journey?

We work with businesses to help them navigate the complexities of PPAs to connect them to truly renewable energy. Please get in touch to find out how we can support.