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Renewables and reform in European corporate PPAs

October 2018  |  SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

October 2018 Issue


Volatile energy prices and rising demand for power are pushing increasing numbers of industrial end users to seek more a stable and sustainable electricity supply through corporate power purchase agreements (PPAs).

The rapidly falling cost of renewables, continuous improvements in clean technology and political pressure to reduce emissions mean that wind and solar are fast becoming the power sources of choice for companies that want to lock in future energy supply at a fixed or more predictable price.

A corporate PPA is a contractual energy supply arrangement directly between a corporate industrial end user and an energy producer. Several big name firms have recently announced PPAs for renewable energy. German automobile manufacturer Mercedes-Benz revealed in July that it had signed a PPA for electricity generated by the Taczalin wind farm to power its engine plant in Poland from 2019. In the US, Swiss healthcare giant Novartis announced in August that it has a PPA for electricity from Inverenergy’s Santa Rita wind farm in Texas.

Europe, the Middle East and Africa (EMEA) collectively form the second largest market for renewable corporate PPAs, with companies in these regions settling 1.1 gigawatts (GW) of clean energy purchase agreements in 2017, according to data from Bloomberg New Energy Finance’s ‘Corporate Energy Market Outlook 2018’.

The US currently leads the world in renewable corporate PPAs, with 2.8 GW of power contracted using the mechanism in the country last year – more than half the global total of 5.4 GW for 2017. Whereas the US has a long history of corporate PPAs, thanks, in part, to its regulatory framework for subsidies, other PPA markets are just starting to pick up.

Types of PPA

Generally, dealmakers distinguish between two kinds of PPA structure – direct and virtual. Direct corporate PPAs, which are also known as retail or physical PPAs, are made between a renewable energy generator and an end user and provide for the electricity produced by a particular installation to be physically supplied to the consumer. In exchange for agreeing to offtake power for a fixed amount of time, corporate buyers of direct PPAs get to lock in stable energy rates for the renewable energy purchased over the contract term.

At present, for a direct PPA to be possible under most regulatory frameworks, the seller’s generating facility and the buyer’s operations generally need be located within the same grid region, which limits the scope of application for this type of contract.

By contrast, in virtual corporate PPAs, otherwise known as ‘financial’ or ‘synthetic’ PPAs, electricity supplied to the industrial consumer does not necessarily come from the seller’s own production installation.

As with direct PPAs, buyers and sellers in virtual agreements settle on a strike price and term for electricity supply, but the power generator sells its electricity directly to the grid at market price. Both sides agree to make up the difference to the other party, if the strike price is above or below the market price.

This is known as a ‘contract for differences’, or a ‘fixed-for-floating swap’, and allows greater flexibility for PPAs between renewables companies and industrial end users based in different grid regions.

Current regulatory framework

Within the two broad classifications of corporate PPAs, contracts can take many different forms – a situation that presents a challenge for energy regulators whose job it is to ensure fair competition between suppliers in their respective jurisdictions and safeguard the interests of energy consumers.

Today, there is no specific regulatory framework for the support or promotion of corporate PPAs at the level of European law and, consequently, no standardisation of such contracts across the EU27.

For example, in the UK and the Netherlands, a producer can sell energy at the meter from the point of exit of the production installation to the final industrial customer, even in the absence of a direct physical connection. Such arrangements rely on the intervention of a supplier, which will also assume responsibility for balancing any disparity between generation and consumption.

In France and Germany, direct sale (or direct marketing) is allowed under renewable energy support schemes, such as the supplementary remuneration mechanism. Generally speaking, the purchase and direct supply of electricity using the grid is not currently permitted in these countries. Network operators, energy suppliers and balancing parties often remain involved in these contractual structures to delineate respective roles and responsibilities.

In many other EU Member States, only virtual corporate PPAs are authorised. Another regulatory condition that has to be taken into account when drafting corporate PPAs is the fact that connecting several companies in the same relevant market via this type of contract with a single renewable energy project can raise competition concerns.

For example, if a corporate PPA structure is envisaged by, on the one hand, a producer or supplier and, on the other hand, a consortium of industrial off-takers competing in similar products and geographical markets, data sharing arrangements should be carefully drafted and monitored to ensure the resulting arrangement is not anti-competitive.

Future tendencies

In the context of the current finalisation of the Fourth Energy Package, also referred to as the Clean Energy for all Europeans Package, which is a proposed revision of, among others, the EU’s 2009 Renewable Energy Directive, it is suggested in Article 15.9 that: “Member States shall remove administrative barriers to long-term power purchase agreements by companies to finance renewable energy and to facilitate its adoption”.

This seems promising for corporate PPAs, in the sense that the removal of red tape should make it simpler to structure contracts and theoretically reduce the amount of time it takes for such deals to be agreed. Such a move would be in step with growing energy demand, increasing renewable power generation and mounting political pressure to cut corporate energy bills while simultaneously bringing down CO2 emissions.

However, practice will show whether administrative obstacles at Member State level will be effectively addressed by national authorities or the European Commission.

Advisers in this area are watching closely to see whether the implementation of the Directive will result in a change in the principle of network and supplier usage and whether the energy sector evolves to make it generally acceptable to regulators for producers to sell electricity directly to customers.

Certainly, an expansion of the corporate PPA model presents opportunities for consumers to limit or even exclude certain network costs, which currently need to be factored into most current energy supply deals.

Regulators may also strive to stabilise the system of guarantees of origin, which label the sources of power and are currently administered at a national level, thus complicating their movement between Member States.

Finally, the Brexit context sheds additional legal and contractual uncertainties on the future of corporate PPAs in the UK. Will a system similar to the EU Fourth Energy Package be maintained, or will the UK authorities opt, with or without a transition period, for new kinds of structures?

Currently, the UK is one of the better developed markets when it comes to corporate PPAs, with a regulatory framework which allows for more flexibility than other EU Member States. Only time will tell, but in the interim, it is advisable for corporates and their advisers to remain vigilant for regulatory or contractual developments, which could either improve on the current framework for PPAs or add further complexity to an already inadequate system.

 

David Haverbeke, Yohanna Weber and Daniel Marhewka are partners at Fieldfisher. Mr Haverbeke can be contacted on +32 2 742 70 13 or by email: david.haverbeke@fieldfisher.com. Ms Weber can be contacted on +44 (0)207 861 4793 or by email: yohanna.weber@fieldfisher.com. Mr Marhewka can be contacted on +49 89 620 30 6211 or by email: daniel.marhewka@fieldfisher.com.

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