August 13, 2019

Renewable Energy Asset Management Guide: All About Corporate Power Purchase Agreements

by James Pagonis

We talk/write/think so much about managing the daily and yearly details of renewable energy projects.  We all get swept up in the day-to-day, and sometimes it pays to remind yourself where the goal posts are. Ultimately, your job as an asset manager is to make sure that your renewable energy projects are profitable. There are two sides to profitability cost management (which we’ve discussed a lot here) and revenue. Let’s talk about revenue. In renewable energy, your site’s revenue stream depends on how it’s selling its power, or its power purchase agreement—the latest trend (and in my opinion, exciting) of which is the direct/corporate PPA. So consider this corporate power purchase agreement 101.

 

What is a corporate PPA?

A Power Purchase Agreement (PPA) is the contract between a power producer and the power buyer (also known as the offtaker). A corporate renewable energy PPA is used when that buyer is a corporation, and not a utility.

 

Amazon would be a great example. Giant companies like Amazon, Apple, and Facebook sign 10-year agreements with small or large project developers/owners to buy their green power.

 

A corporate solar PPA is an offtake agreement, like any other offtake agreement with a utility, and can come in just as many flavours as a utility PPA. The corporate offtake agreement can include such structures as Feed-in-Tariff, time of use or net metered PPA.  So why is it that there are so many corporate PPAs now being signed? …after all, they did account for a whopping 22% of all U.S. wind and solar procurement contracts last year.  Simply put, For companies, they’re a way to apply their sustainability pledges while also gaining access to long-term price predictability. And for the power producer offtake agreement is simply an agreement to buy a certain amount of energy from a producer. You’d use a corporate power purchase agreement if that buyer is a non-utility company.

 

How did they become so popular?

A old concept that has become a more recent phenomenon, corporate PPAs are increasingly important, as subsidies become less reliable for future projects in maturing markets. This leaves renewable energy producers to compete at wholesale energy prices, corporate PPAs give project owners and investors alike access to a new, stable, long-term revenue stream. For the corporate offtakers it’s a simple there is generally a cheaper electricity price and the marketable goodwill value of being more environmentally friendly.

 

What goes into managing a corporate PPA?  

Importantly, these PPAs (and what goes into managing them) have evolved, as corporations have gotten more savvy.

 

Historically, these agreements were created as one-offs per company or per project.  The end result was often a pile of PPAs all structured differently, and with different terms.

 

As companies grew, some formed alliances to be able to streamline the contract process. This made good sense—it not only helped companies and solar/wind developers avoid costly legal fees, but standardized the agreements themselves (I’m a huge fan of standardization). Now, corporate PPAs show a trend towards consistent formats and terms, which makes them easier to administer.

 

Managing corporate PPAs isn’t necessarily more difficult, but there are a lot of new structures to consider, details to remember and tasks to keep on top of.

 

Corporations are limited in what they can and can’t take, and that makes things complicated. So corporate agreements come with a minimum threshold of power generated, and if it’s not met, it means fines. There can also be maximums, so project managers might have to track sales of additional power above the maximums so they can bill the market rate to the utility.

 

While corporate PPAs are increasingly standardized, they still require a lot of management and reporting. It just means that the nature of the agreement is consistent, so your only worry is compliance and billing.

 

What else can they include?

Sometimes, corporate PPAs are just the credits from the facility and not the actual power. The company is purchasing “green” credits or RECs.

 

Renewable energy is by definition, a green, non-carbon emitting, energy source. The corporation might not necessarily be (physically or financially) able to connect to your facility, and/or because you can’t generate them all the power needed at all times.  So they may buy green credits to offset the power they use.

 

It’s like paying tax for using carbon. For example, in Alabama, the grid is connected to a coal plant, so almost all of their power is dirty. If you have a mandate to be more sustainable, you can buy credits for renewable power generated elsewhere. In this way, you’re giving the market incentive to keep building green power.

 

What will future corporate PPAs look like?

Corporate PPAs are evolving as companies get more comfortable with buying energy directly. Predictions for the future include a semi-return to more tailored and complicated contracts, to suit offtakers with varying levels of consumption and risk. There is also the potential for other electricity services, such as peak shaving or frequency management, if coupled with batteries. There are a lot of creative ideas out there, it’s just a matter of determining whether they make financial sense.

 

On the asset management end, the best way to strategically manage your offtaker strategy is to look for common trends. Look for things—issues, questions and feedback—that come up consistently, because they’re important to the corporation. These trends show you what to focus on, and how to better tackle corporate PPAs.

Want to learn a bit more about managing renewable energy PPAs?  Check out this article.

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