Residential property
20 Nov 2017 News

Corporate PPAs

Ofgem published its first annual State of the Energy Market report on 31st October 2017.

Amongst their findings relating to non-domestic retail markets for gas and electricity they state:  ‘Larger business consumers can often negotiate good deals with suppliers, but smaller ones tend to pay more for their energy, and switch infrequently. Average business electricity prices are around 50% higher for very small firms than for large or very large consumers, while non-domestic gas prices can be twice as high.’ 

We are now seeing mid sized non-domestic commercial and public body consumers reviewing how they structure their gas and electricity supplies and renewables developers seeking new routes to market to attract funding.  Beyond switching suppliers on standard pay as you go contracts and considering private wire supply or auto-generation there is a third alternative.

While Corporate PPAs (Power Purchase Agreements) have been around for 10 years among the larger corporate and public energy users their popularity is likely to increase due to the perception of increased energy price volatility.  SME sized bodies will begin to explore this approach to securing certainty of pricing in the long term and secondly to pursue corporate social responsibility and green agendas by targeting new and existing renewable energy generation.  Renewables generators are also seeking long term contracts with good floor prices to assist with funding debt for development.   For these reasons there may be a lot more interest in this power purchase mechanism.

A corporate PPA is a contract entered into directly between a generator and a customer which allows the customer a purchasing relationship with a generator, without making an equity investment or needing a direct physical connection to the generation plant.  It may take the form of a traditional PPA or be a type of contract for difference.  A corporate PPA can bring electricity consumers and generators together irrespective of location, generating capacity and supply requirement.  Furthermore many onsite or direct connection arrangements still require grid connections to cover failure/surplus/shortfall issues, while with a Corporate PPA that optionality is a given.

For a public or private sector organisation with significant electricity usage, a corporate PPA can help to spread the risks associated with fluctuations in electricity prices by acting as a fixed price hedge against rising wholesale energy costs. In addition, it can provide a contractual link to an identifiable source of renewable energy generation.

For a generator, or group of generators, it provides the possibility of a different route to market with a longer term fixed price, or an innovative pricing strategy, agreed with a customer regardless of location.  Debt providers will look for guaranteed minimum power prices on which to base their lending decision. Corporates in the corporate PPA market have been prepared to offer higher fixed prices which, compared to available floor prices, can be attractive to generators and their funders.

As with any PPA, contract for difference, or large supply contract in the energy sector, the generator, customer and licensed supplier will need to consider the tax and regulatory issues arising and often the co-operation of a Licensed Supplier.

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