29 March 2021:
Levent Gurdenli, Weightmans
Procuring renewable power under a long term, fixed price corporate PPA is high up on the agenda for many water companies as they seek to decarbonise their intensive energy demand and protect themselves from volatile fluctuations in energy costs. The industry as a whole has ambitious plans to become carbon net zero by 2030. This strategy includes taking advantage of corporate PPAs together with investing in other forms of energy efficient technology and electrification. While water companies are likely to have land available to them to accommodate a certain volume of on-site generation, it may not be sufficient to offset all of their demand. As such, procuring renewable power under a “sleeved” or “synthetic” corporate PPA provides an exciting opportunity for water companies to achieve these targets.
How does the risk profile of a corporate PPA differ from traditional methods of procuring power?
Purchasing renewable power under a sleeved or synthetic corporate PPA is fundamentally different to traditional methods of procuring electricity. At present, corporate buyers procure their power from licensed suppliers. Some buyers are more sophisticated than others but, on the whole, it is a well understood process. In turn, the licensed suppliers procure their own power from a variety of different sources on the wholesale market, managing the balance of supply and demand in order to provide a baseload of power to the corporate buyer. A sleeved or synthetic corporate PPA has a very different risk profile to traditional methods of procuring power as it exposes the corporate buyer to the balancing role (and the risks associated with it) that licensed suppliers or utilities have traditionally dealt with. This presents a challenge for corporate buyers who need to understand what these risks are, how to manage them and how they could be mitigated before deciding whether or not a corporate PPA is right for them.
What are the main risks for buyers to understand?
Of course there are other issues which need to be dealt with in the negotiation of a sleeved or synthetic corporate PPA, but the three fundamental risks for a corporate buyer to understand are:
- volume – where the renewable plant does not produce the volume expected from long term forecasts – e.g. due to weather related issues;
- profile – though overall volume may be sufficient, where the hourly production from the renewable plant does not correspond to the buyer’s demand profile; and
- price – losses occurring from adverse movements in market price of electricity.
To illustrate this, consider that under a fixed price corporate PPA on a “pay-as-produced” basis (i.e. buying 100% of the output), the buyer’s total price for a MWh of power will only truly be fixed at times when demand and generation completely match. If the renewable plant over-produces then the buyer is paying for power which it may not need. If the renewable plant under-produces then the buyer (or licensed supplier on its behalf) will need to procure top-up “balancing power” from the market. The buyer is further exposed if this occurs at times when electricity prices are high.
How can you manage or mitigate these risks?
At Weightmans we work with corporate buyers to help them to understand the structures of these agreements, the risks associated with them and, ultimately, whether they are right for them. We can also advise clients how to manage these risks and what contractual levers can be pulled to mitigate them in the context of negotiating a corporate PPA. Changing the risk allocation in one area – for example asking the generator to guarantee certain volumes of power – will have implications for different aspects of the agreement, such as the price which can be offered or the term. A successful negotiation will involve exploring who is best placed to manage a particular risk, understanding the critical requirements of a generator and finding the contractual position which both parties can accommodate.