2018 was a record year of corporates buying clean power through long term contracts, doubling since 2017. In this interview, South Pole experts, Paul Hill, Principal Consultant, Patrick Horka, Head of Renewable Energy Services and Michael Weber, Business Development Director, Germany discuss the key trends you need to know about.
2018 was a record year. Why is the market for Power Purchase Agreements (PPAs) taking off?
Paul Hill: It’s great to see the market continue to grow and it’s no surprise. Increasingly, corporates are seeing the value of PPAs to quickly and effectively achieve CSR and carbon reduction targets and also to hedge against price volatility in the longer term. PPA prices are getting close to grid energy pricing in some markets, meaning procurement managers can present a stronger business case and gain C level buy-in.
Patrick Horka: I’d add that the deregulation of the electricity markets, phase out of feed-in tariffs, and falling auction prices have also been factors. Corporate PPAs give project developers an alternative route to market and can gain long-term price certainty for their project from a creditworthy counterparty.
Michael Weber: For me, the strong growth in demand from large multinational corporates is because they understand the value of 100% RE claims for their public reputation both with employees and customers, for their position in the eyes of investors and to fulfil targets embedded in the company strategy. The RE100 initiative has helped raise awareness of the action corporates are taking.
What trends do you see in the different PPA models?
PHI: We’re seeing US corporations entering the European markets, and, in some instances, adopting the US Virtual PPA model – contracting an increased volume in one country to cover their aggregate demand across a wider region. Companies have to consider the trade-off between simplifying the process, contracting all volume in the most attractive market, versus managing basis risk, where the PPA reference price is not correlated to prices they are exposed to across the different regional trading hubs.
PHO: The recent Nike deal was really interesting and highlights a different option for how businesses with a broad geographical footprint might approach contracting PPAs. Nike’s PPA in Europe used a Spanish project to meet its pan-European electricity demand.
MWE: As well as aggregation of demand from one buyer across different countries, there’s also an increase in aggregation of demand within a country across different buyers. Firms are aggregating their electricity demands to benefit from economies of scale from larger solar and wind projects.
So, what does the aggregation model mean for the market?
MWE: It means we’re seeing some interesting partnerships as smaller corporates are realising they can benefit from partnering with a bigger more experienced buyer who can offer a stronger balance sheet when signing a PPA.
PHO: That’s right. In essence, more demand will be created for corporate PPAs as smaller corporates engage in PPAs as well because they can share risks associated with credit and energy market volatility as well as share transaction costs with their peers.
PHI: Currently, it’s a pretty select group of companies that can contract a utility-scale Corporate PPA – large energy users with a very strong credit rating. Aggregation would be one way in which we could open up the market to achieve ambitions of moving from ‘100 to 100,000’ buyers.
Are you seeing some regions leading over others?
PHO: The US market is the most mature and largest by some distance. However, we are now seeing deals being struck in Europe, in particular in Spain and the Nordics. We anticipate continued growth as more and more markets deregulate and pull back subsidy regimes. APAC is picking up but for now, the demand is very much concentrated in India and Australia.
MWE: Corporations in EMEA purchased record volumes in 2018, double the 1.1GW n 2017. There has been strong activity across the Nordics, including in Denmark, which had been slower to make use of corporate PPAs. The Danish healthcare giants Novo Nordisk and Novozymes entered into an agreement with Vattenfall to purchase one-fifth of the energy produced from the offshore wind farm, Kriegers Flak.
How do you see PPAs working together with other onsite or energy attribute certificate (EAC) renewables solutions?
PHI: As a business, we remain agnostic in our approach. Some companies focus primarily on the option with the strongest business case and others on making the greatest impact. Our role in the early stages of engagement is to make our clients aware of the risks and opportunities of each solution to ensure informed decision making.
PHO: Onsite RE has the potential for the largest cost savings. However, it typically covers only a fraction of total demand and may not physically be possible at some locations. Corporate PPAs are often the best solution to cover a significant amount of demand while providing electricity price security.
MWE: EACs can play a key role in helping achieve a 100% RE commitment because often combining on-site and corporate PPAs together won’t fully cover the energy demand a corporate has. EACs are also a great interim solution to reach RE targets before corporate PPAs are signed and on-site solutions constructed.
What is the main energy mix of PPAs?
PHI: The majority of corporate PPAs are wind or solar for the simple reason they are established, trusted technologies and are also the most competitively priced.
PHO: Solar PV is picking up due to continuing falls in the LCOE. The generation profile of a PV power plant usually matches the load profile of most corporate off-takers, that is demand and supply during the day.
MWE: Wind energy made up more than half of all corporate PPAs in Europe in 2018. They’re becoming more popular in Portugal, Spain and Germany. In Germany, Mercedes Benz became the first car manufacturer to enter into a PPA.
South Pole’s renewable energy service offering is expanding! Read about our recent acquisition of renewable energy consultancy and corporate PPA advisor, Almach Energy, here.