Corporate PPA – Direct sale of electricity: Is it an option?

Corporate PPAs are already implemented on a global scale. They offer good opportunities for implementing projects on the basis of bilateral agreements on the sale of electricity. Even more opportunities will arise if energy wheeling agreements are concluded enabling electricity consumption at a different site from where it was produced.

In various countries, FIT (feed-in-tariff) systems are being more and more often replaced with auctions. On the one hand, of course, auctions significantly limit the market volume (see the planned PV expansion in Germany: 600 MW_p per year according to the EEG 2017 [German Renewable Energy Act], § 28 Auction volume) and – despite numerous reports published by the BNetzA (German Federal Network Agency) stating otherwise – they significantly limit the diversity of bidders. From our own daily consulting practice, we see that many small developers but also utility companies, municipalities and citizen-owned energy cooperatives are deterred from bidding in auctions under the EEG only because of uncertainty as to the cent/kWh rate applicable under the EEG, the effort and expenditure connected with securing rights to land, and the planning approval procedure (e.g. with landfills). The venture is more capital-intensive and, thus, has created the need to raise venture capital in form of project developers or consultants. Moreover, depending on how they structure their purchase policies, large companies can achieve significant advantages as regards construction costs and, ultimately, the decisive electricity production costs. This is an even more important factor than financing conditions available on the basis of current interest rates and/or returns on equity.

Various project development companies and also power producers highly praise corporate PPAs, i.e. direct sale to private corporate offtakers (such discussions also took place at the Rödl & Partner Branchentag in November). In Germany, this model would be rather difficult to implement due to the EEG surcharge (such models are being tested as part of PV leasing models) but abroad, it could be quite a viable solution.

Eventually, two models can be distinguished: one where a power plant can be directly connected to the building where electricity is consumed, and one where energy wheeling is necessary.

Surely, the first model will always be attractive if there are areas available on a specific land plot, e.g. for PV. Roof-tops, parking facilities and marginal areas can be used and the EPC/IPP will contribute its know-how enabling the construction of an optimal demand-oriented installation. Electricity is fed into the grid assigned to the specific land plot and consumed on site (in some countries feed-in of surplus electricity or net metering is possible). In the medium term, amid decreasing prices for battery systems, also decentralised load management (peak shaving) will considerably gain in importance.

Any market research should first and foremost focus on the level of electricity prices in the industry because if savings cannot be generated no one will rather want to enter into any contractual commitments. In addition, a power purchaser should also conclude PPAs in foreign currency (dollar, euro) – this will simply allow for financing in countries with higher currency risks. It will be a bilateral transaction between the power producer and the consumer. Of course, such models should be also promoted by the regulatory framework in the long term – which is not the case in Germany but it is indeed in emerging countries.

The second model involving the use of a transmission system is a little more complex and requires more contractual ties but also offers considerable opportunities in particular for wind farms or large-scale PV installations since the power plant site and the site of the consumer can be remote from each other.

The model pictured in the graph is currently being implemented by a client in Ghana. There, high electricity prices for end-consumers, very good resources (in this case, the wind conditions at the coastal site) and a transparent regulatory framework are important factors which make the regulatory risk acceptable. Moreover, the PPA is concluded in dollars, which is not a problem for the exporting end-consumers and, thus, virtually eliminates the currency risk in financing. Ultimately, state influence is considerably avoided and a bilateral power supply agreement is concluded. The purchaser’s creditworthiness is central but the operator’s risk can be diversified by concluding agreements with several offtakers. Of crucial importance will be the price level – if the offer is more attractive than the electricity price offered by the state utility (this is the case in Ghana) the bank will be inclined to favourably evaluate the risk related to the sale of electricity. In particular in the first project attempts, it will be advantageous to choose financially strong customers in order to reduce the difficulties in the pilot project. Especially mines could be of interest since, basically, they are a safe business, involving various locations and export.

The following table shows corporate PPAs abroad and a few in Germany. The focus of the research was on large-scale projects. It would be rather impossible to capture the myriad of smaller “contracting” projects.

When analysing markets you should also focus on the German manufacturing industry. From enquiries we receive we know that manufacturers are very willing to collaborate with German IPPs (Independent Power Producers) provided that those can raise the capital needed to erect and operate a facility in the long term. In the abovementioned countries such projects have already been implemented and opportunities for implementing projects without direct access to the electricity market have also become visible in emerging countries (e.g. Mexico) and even in developing countries. Direct access to electricity markets is, however, becoming increasingly difficult in European countries because the success of renewables could now turn into a burden: due to the constantly decreasing electricity production costs only short-term sale agreements are concluded (because of the risk related to the sale of electricity, if e.g. in 5 years power plants will produce electricity sold at even cheaper rates). While financing requires longer-term agreements. Spain, where the minimum price is state-guaranteed, is a country showing a possible solution that could be applied. But also corporate PPAs are an option provided that they will be appropriately accommodated in the regulatory framework of a given country.