Green corporate PPA as a means against electricity price increase?

published on 20th August 2021

The development of electricity prices suggests a new high in the offing. This gives rise to clear opportunities and recommendations for Corporate PPAs, which – due to their multi-faceted nature – can improve sustainability and secure more stable electricity prices for enterprises.

The current situation on the German electricity market is unfolding with a speed that could not be expected. Or could it? Even if the electricity prices on the electricity exchange (EEX) develop only partially in line with general expectations, every German (or European) company will have a clear interest in considering new ways of purchasing energy.

Electricity price rally

The electricity spot market is currently affected by diverse factors which significantly influence the electricity price:

The coronavirus pandemic: As a result of curbing the pandemic, more and more companies resumed or established business operations and thus electricity consumption increased (the gross electricity production stood at 292 TWh (billion kWh) – a year-on-year rise of almost 5 per cent (the first six months of 2020: 279 TWh)). The gas price is at a high level as well, driving up the costs of gas-fired power plants, which are often price setters, and thus also pushing up the electricity price.
CO₂ price: The CO₂ price has increased in the European emission trading (see the chart below):

Thus the CO₂ price per tonne has visibly increased from 50 euros to almost 70 euros since January 2021. The most likely reason for this are the improvements to the climate protection targets which the EU announced at the beginning of the year. This strengthens the trend going on for quite a long time to put ever stronger pressure to force coal-fired power plants out of the market. The outcome is the current revival of gas-powered power plants, which are now considerably increasing their share on the electricity market due to more favourable CO2 emissions factors per kWh.
Renewable energy: Renewable energies have still been somewhat flagging in comparison to 2020. The first half-year saw relatively little sunshine and wind, which caused a decline in the share of renewable energy in gross domestic electricity consumption to 43 per cent (2020: 50 per cent), according to the preliminary calculations of the Center for Solar Energy and Hydrogen Research Baden-Württemberg (ZSW) and Bundesverband der Energie- und Wasserwirtschaft [Federal Energy and Water Management Association] (BDEW).

In view of the Green Deal and the tighter climate protection targets set for the EU in the European Climate Law (55 per cent CO₂ reduction by 2030), a further drop in the availability of certificates, and an increase in financial investors in the CO₂ market, it is to be expected that the CO₂ price will continue to rise. There are even talks about 100 euros per tonne in the short or medium term. This is the toll to pay for the energy policy of the recent years, which has quite significantly hindered the renewable energy expansion, for example, by creating hurdles for wind energy (the 10H rule), implementing restrictions regarding areas eligible for photovoltaic power plants, and imposing the EEG surcharges on power plants generating electricity for self-consumption. If coal-fired power plants are eliminated from the market due to high emissions factors and are largely replaced with gas-fired power plants, the prices will remain high.

This is illustrated by the current price development on the electricity market and the current figures and trends for 2022.

electricity price developement

The chart shows the rates of the Baseload Year Futures for the year of supply 2022 (purchase 2019, 2020, 2021); it can be seen that the prices for electricity currently purchased for 2022 are already significantly higher (the values go nearly parallel to the price curve for CO₂ emission rights for 2022). The electricity price for baseload futures 2022 is thus currently about 65 euros.

It is difficult to tell where this road will take us in 2022. At present, however, there are clear tendencies showing that the price level on the electricity market will be higher than in the last five to ten years

Green Corporate PPA?

The question is now whether it wouldn’t be better if a company actively purchased (green) electricity itself on the electricity market through direct electricity contracts (PPAs). This is made possible especially by green power PPAs. Although this approach seems unusual, given the expectations for the electricity market described above, the opportunities currently seem to outweigh the risks.

A green corporate PPA enables purchasing a percentage of the electricity you consume at largely stable prices over a certain period of time (5, 10 or 15 years) and thus hedging your electricity costs at least proportionally against electricity price increases. In some scenarios, it is possible to even save on electricity tax or grid fees, which thus generates even further savings.

Essential, however, is the decline in PV costs, for example. Deals to the tune of 5 to 6 ct/kWh and below the above electricity price level are not improbable. Of course, there are various factors that should be taken into account in the economic considerations:

Distance to point(s) of consumption
Load profile of the building / facilities to be supplied with electricity
Type of generation system (wind, PV)
Orientation of the PV system (south, east-west)
Effect on costs of the residual load

Various large companies in Germany (and Europe), such as Mercedes-Benz, Fraport, Deutsche Bahn and VW, have resorted to green corporate PPAs for some time now, as they are interested in reducing their own CO₂ footprint for strategic reasons and have certainly also recognised the opportunities for stabilising their own electricity costs. There are rather fewer projects than before taking place in the direct vicinity[BE1] , which also benefit from the sometimes considerable electricity cost privileges (on-site PPA). It is precisely here that Rödl & Partner sees considerable potential, partly due to new PV technologies or through partnerships with local commercial enterprises or municipal utilities.

The options (including virtual PPAs) should be examined individually for every site, and as early as possible, because demand for green electricity (and thus also for the technology) will increase significantly in the coming years – and this also increases the opportunities for the renewable energy sector. Green corporate PPAs are an excellent opportunity for implementing projects outside the EEG and thus for freeing yourself from the shackles of land use, etc. In the case of pure off-takers, the creditworthiness of the end consumer naturally comes to the fore. But especially in cooperation with municipal utilities, which can then also supply the residual electricity, there are good opportunities for taking the next step on the market. In the short to medium term, it will be standard practice to master and implement such sales models.