PPAs and the corporate renewables revolution
State of
the market
The role of corporate climate initiatives
The Russia effect
Renewable energy purchasing options
Power Purchase Agreements
Walmart offers Project Gigaton PPAs to suppliers
What happens when the wind doesn’t blow? Google pursues 24x7 renewables
Overcoming structural issues
Green Tariffs
Conclusion: PPA progress looks set to continue
TOPICS
The European market lags the US but has been growing strongly, while Asia has long been a laggard, in part because there have been no established mechanisms for companies to buy clean power directly in key markets such as China, Japan and South Korea.
State of the market
The high profile RE100 campaign has been a key driving force behind the growth in the corporate PPA market, bringing together a host of leading corporates that have publicly committed to sourcing 100 per cent renewable power. In total, 67 companies signed up to an RE100 target in 2021, taking total membership of the group to 355 members in 25 countries, with a collective demand of 363TWh of electricity a year – more than the UK's entire power supply for the same year.
BNEF estimates that these 355 RE100 companies will need to purchase an additional 246TWh of clean electricity in 2030 to meet their targets. “Should this shortfall be met with offsite PPAs, it would catalyse an additional 94GW of new solar and wind build globally,” the company calculates. “This is on top of the 47GW of PPAs already signed by RE100 members.”
Again, many of the global tech and retail giants are to the fore, using their convening and procurement power to connect their large suppliers with renewables developers. In the US so-called virtual PPAs have started to emerge, where corporates bundle together a number of renewables projects into a PPA that can then be shared between multiple smaller businesses in their supply chain, providing the suppliers with access to lower cost power than they could procure on their own while allowing the corporate giant to slash emissions and costs from its supply chain in one swoop.
Direct air capture plays an important and growing role in net zero pathways
The role of corporate climate initiatives
“Corporates had a lot of power a few years ago,” Kristina Rabecaite, founder and CEO of PPAYA, a clean energy procurement platform. “Developers needed stability, so they were prepared to put up with really low prices. Some projects didn’t get built because the price was negotiated down so much. Now, the tables are turned. No-one wants to contract with corporates because they can get long-term contracts in the market. Corporates have to offer more money to compete with the market.”
“The Contract for Difference [offered by some governments, which guarantees power prices for generators] has been fantastic for generators. And quite a lot of new projects are saying they don’t need corporate PPAs, they will just sell direct into the market.”
Russia’s invasion of Ukraine has pushed oil and gas prices to record highs. This has had two contradictory effects on the PPA market and wider corporate interest in renewables: by massively increasing the price of fossil fuels and introducing huge levels of volatility into the gas market, it has made the case for renewable power and long-term clean energy contracts much more attractive; but at the same time it has hugely increased demand for PPAs allowing developers to demand higher prices for the power they sell.
The Russia effect
It is a shift in the balance of power that some corporates are struggling to adapt to. “The power is with the generators now,” says Bowden.
However, Flemming Sørensen, VP for Europe at LevelTen Energy, said demand for PPAs remained robust, despite rising prices. “Corporations can use PPAs to stabilize their energy costs, meet their emissions reduction targets, and demonstrate their commitment to sustainability and energy independence,” he said. “That’s why despite higher PPA prices, we’re still seeing strong demand for PPAs... The challenge is that supply can’t keep up because of permitting and interconnection issues. And now, because of high wholesale electricity prices, developers have more options to finance their projects outside of PPAs, which further limits supply.”
State of
the market
Businesses can generate their own power, by installing solar panels on roofs or wind turbines in the grounds of their premises. Biomass generation and combined heat and power technologies can also offer businesses a source of on-site low carbon power.
Renewable energy purchasing options
Procuring green power through a PPA remains complex, but a number of companies are working to make the process simpler. “The energy industry remains one of the oldest, most manual industries out there,” says Rabecaite. “Although there is lots of technology being built to do things like balance the grid, not so much is being done to improve the day-to-day purchasing of PPAs. When prices spike, everyone wants to lock in an agreement on the same day, but the energy providers can only serve about 10 people a day. We need scalable technology in place so we can execute hundreds of PPAs a day.
Overcoming structural issues
The vast majority of utilities now offer customers the option of a green tariff, allowing buyers to claim that the power they buy is green.
Green Tariffs
the world’s first and largest climate-positive direct air capture and storage plant
When renewable energy first entered the power markets, progress was painfully slow – the technologies were unproven, costs were high, investors were wary, and the amount of capacity was miniscule. If businesses had any interest in utilising renewables, it was more likely to be as part of a PR exercise than an energy procurement strategy.
Editor-in-chief, BusinessGreen
James Murray
Introduction
Physical PPAs, which involve longer term contracts than generators can get in the market, can offer significant cost savings for corporates. However, those savings are lower than in the earlier days of the market, when energy prices were lower.
Power Purchase Agreements
Physical PPA
There are also ways to combine some of the benefits of on-site generation with the long-term stability and relatively low levels of hassle a PPA offers.
On-site PPA
But as the market started to become more established and the clean energy technologies matured, growing numbers of companies started to realise that there were benefits from buying clean power that extended far beyond the reputational. Sourcing renewable power helped businesses expand a strategically critical market, drive down carbon emissions, lock in price certainty, and hedge against fossil fuel volatility, as well as giving them a toehold in an industry that promises to transform the global energy market. As renewables developers began to exploit economies of scale and move wind and solar power down the cost curve, corporate customers also realised that they could reduce their energy costs by increasing their reliance on renewables projects.
As such, a small number of leading companies started buying green power direct from project developers through corporate power purchase agreements (PPA). An under-reported boom quickly followed.
In 2010, companies procured around 100MW of renewable energy directly, according to data from influential analyst house Bloomberg New Energy Finance. By 2021, corporate renewable energy procurement had risen to more than 31GW, making the corporate sector responsible for about a tenth of global renewable generation capacity. The figure was up almost a quarter from 2020, which was itself a record-breaking year.
No company is yet able to operate using 24/7 renewables at scale, but some of the world’s most advanced tech firms are now working at the cutting edge of the net zero transition and their learnings could play a critical role in deliver a zero-emission grid for everyone.
Other companies have followed Google’s lead and are also exploring how they can source renewable power round the clock, with Microsoft, Mercedes Benz, IKEA, and data centre group Iron Mountain to the fore.
“our new carbon-intelligent computing platform shifts certain non-urgent jobs at Google data centres to times when low-carbon power sources, like wind and solar, are most abundant on regional grids. In the future, we expect to expand the program to also shift computing work across different data centre sites.”
Having been the first major company to become carbon neutral in 2007 and the first to match its energy use with 100 per cent renewable energy in 2017, Google is now working to run on carbon-free energy everywhere, at all times.
What happens when the wind doesn’t blow? Google pursues 24x7 renewables
However, it is also encouraging its giant supply chain to take action to source their own clean power through Project Gigaton, its initiative to avoid a gigaton of greenhouse gas emissions from its global supply chain by 2030. In September 2020, in collaboration with Schneider Electric, the company launched the Gigaton PPA to help suppliers accessing renewable energy contracts and accelerate greater renewable energy adoption. The initiative has sparked significant interest, as major suppliers look to reduce their own emissions and energy costs.
Walmart offers Project Gigaton PPAs to suppliers
Walmart, the world’s largest retailer, has “committed to becoming a regenerative company powered by 100 per cent renewable energy in our own operations by 2035”. It has procured more than 500MW of wind power from Engie North America in three different states and it has added significant solar capacity, too, both on its own facilities and offsite, in eight countries and 30 US states.
Given current trends, companies that have not yet developed a clean power procurement strategy should do so – and fast.
While the relentless reduction in the price of renewable energy technologies has slowed, as a result of supply chain constraints, wind and solar power are now much cheaper than fossil fuel power while emerging renewable energy technologies are on a similar downward cost curve.
Conclusion: PPA progress looks set to continue
In contrast, wholesale gas prices have been pushed to record highs by Russia’s war on Ukraine and the consensus view is that energy prices will remain both high and volatile for years to come.
Against this backdrop the financial and commercial case for both onsite generation and clean power PPAs has never been higher, even if the price of PPAs has climbed in response to soaring demand
At the same time, the imperative to tackle climate change grows more evident every day, with heatwaves, droughts, floods and other extreme weather events illustrating the need to slash emissions. As a result, a growing number of companies have set net zero targets and signed up to initiatives such as RE100 and the Science Based Targets initiative.
Sourcing clean power remains an absolutely core component of any credible net zero strategy and as such demand for renewable energy from the corporate world is only going to increase. As Harrison observes, net zero targets and the growing number of 24/7 renewables commitments “will create a boatload of demand” for corporate PPAs. “We’re very bullish on the market long term,” he adds.
Under an offsite physical PPA, also known as a sleeved PPA, a company agrees to offtake power from a renewable generator located off-site, with the energy generated by the power plant delivered to the site through the grid.
This type of agreement can provide the financial security that allows a new project to go ahead, creating “additionality”, which is still an attraction for companies looking to decarbonise their electricity supply. Bowden, of Squeaky Energy, says that the company “promotes physical PPAs. We buy power and renewable energy certificates together – that’s how you secure really clean energy.”
The role of corporate climate initiatives
The Russia effect
Renewable energy purchasing options
Power Purchase Agreements
Green Tariffs
Overcoming structural issues
What happens when the wind doesn’t blow? Google pursues 24x7 renewables
Walmart offers Project Gigaton PPAs to suppliers
Conclusion: PPA progress looks set to continue
The contractual complexity and long-term nature of PPAs means they tend to be the preserve of large corporates, but a relatively new wave of so-called virtual PPAs is seeking to open up the market to larger numbers of smaller businesses.
Mike Scott is the founder and CEO of Carbon Copy Communications. He has more than 30 years’ experience of covering environmental and business issues and won the Contribution to Climate Change Journalism prize at the 2021 Sustainability Media Awards.
About the author
Physical PPAs represent the most popular and scalable form of PPA, providing large corporates with the ability to prove that they are fully decarbonising their power supplies and directly increasing the amount of renewable power on the grid.
In China, the situation is very province-specific – some provinces allow PPAs while others don’t, and prices vary from place to place as well. In Japan, there is no corporate PPA market “but there are workarounds,” Harrison says. “Companies sign up for a private wire PPA and pay the utility to ‘rent’ the transmission line and deliver their power”.
PPA prices may be rising, but there are still compelling reasons for corporates to seek renewables contracts and even if they do struggle to access new projects there are a range of different PPAs and non-PPA options for firms looking to source 100 per cent renewables:
The Science Based Targets initiative is also having an impact. Many larger companies that have signed up to the initiative are not only working to cut emissions from their own energy use, but are also engaging with their supply chains to help them to decarbonise their electricity use so as to reduce their Scope 2 and 3 emissions.
The PPA market is currently dominated by the US, which in 2021 was responsible for 65 per cent of corporate clean energy purchases. Perhaps unsurprisingly, the market is further dominated by large tech companies such as Google, Amazon, Apple, Microsoft, and Meta, which signed more than half of the deals recorded in 2021 and are likely to continue to drive the market. Amazon, for example, contracted to buy more than 6GW of capacity last year, bringing its total portfolio to almost 14GW. That makes it one of the biggest renewable energy players in the world, with a portfolio slightly larger than that of EDF, France’s national energy utility.
• Unlimited access to BusinessGreen.com
• Exclusive must-read daily Overnight Briefing
• Expert monthly Editors Briefing
• Access to the Net Zero Festival
• Annual BusinessGreen party invitation
Not your copy? Become a BusinessGreen member here
You are receiving this because you are an BG Advanced member.
Here are your other membership benefits:
Nonetheless, “the landscape of buyers is diversifying both in sector and geography”, says Kyle Harrison, head of Sustainability Research at BNEF, with clean energy contracts being publicly announced by more than 137 corporations in 32 different countries in 2021.
The initial driver for the PPA market was corporate concern for the environment, which has been increasingly translated into solid commitments such as targets to source 100 per cent renewable power or deliver net zero emissions. But the relatively low cost of wind and solar power compared to soaring wholesale gas prices, coupled with the ability to lock in prices for 10 to 15 years at a time when wholesale power prices are hugely volatile meant there is an increasingly compelling financial rationale for large corporate energy users to consider PPAs.
At the same time, the arrival of hundreds of independent power producers (IPP) has led to the market fragmenting as it moves away from being reliant on a handful of national suppliers, says Chris Bowden, managing director of clean energy marketplace Squeaky Energy. “When you have lots of sellers, you can build a market to bring buyers and sellers together,” he reflects. It is a trend that is creating liquidity in the market, which further boosts the attractiveness of PPAs.
More corporations are making new sustainability commitments, costs for renewables are plummeting and regulators around the world are slowly coming around to the fact that clean energy might be a silver bullet in the decarbonization of the private sector,” explains Harrison.
RE100 provides a network and a set of best practices that can help corporates quickly source PPAs or switch to clean energy tariffs, as well as a platform through which leading companies can promote how they are decarbonising their energy supplies.
However, there are signs that the campaign’s focus and impact is evolving. “RE100 played an important role in encouraging corporate PPAs,” says Harrison, “but momentum has slowed. Last year’s number of new members was the same as the previous year and this year it is currently down on previous years. When you look at other sustainability initiatives like the Science Based Targets and TCFD, there is much more momentum.”
This is, in part, a reflection of the campaign’s success and the growing maturity of the market. Corporate renewable buying has become a much more standardised business practice and as such plenty of companies are now taking the decision to source renewables without necessarily feeling the need to make a public commitment.
However, while this may be true for more mature markets such as North America and Europe, the campaign remains an important influence in Asia-Pacific, where corporate clean energy purchasing is not as readily available and there is considerable value in companies working together to source renewables capacity and lobby governments to bring more clean power projects online.
As a result, corporates are having to pay more than before if they want to secure PPAs. This trend is borne out in the data. European PPA prices rose 27.5 per cent in the year to March 2021, according to LevelTen Energy, while in the year to June 2022, North American PPAs rose 29.7 per cent. By the third quarter, European solar and wind PPA prices were up 11.3 per cent to €73.54 per MWh. European PPA prices are now 51 per cent higher than the same period in 2021, according to LevelTen Energy.
It is a concern echoed by Bowden at Squeaky Energy, who points out that it can still take 10 years to get wind farms built in Germany, despite significant pent-up demand for the resulting clean power.
On-site generation
There are considerable pros and cons to on-site generation. On the plus side, plummeting solar and wind power costs in particular, coupled with soaring and volatile energy costs, make on-site technologies an increasingly attractive and predictable financial proposition. Financial returns will vary significantly based on location and technology choice, but onsite generation is increasingly worth exploring for all businesses. Moreover, the growing maturity of energy storage systems and energy management software has further bolstered the financial case for generating your own power. Companies can now sell clean power back to the grid, dynamically match demand to the times when power is cheapest, and ensure they have access to clean back up power in the event of blackouts.
Onsite generation is also a highly visible way of cutting emissions, providing employees and customers with a daily reminder that the business is committed to climate action.
However, not every business has the land and rooftops that are suitable for onsite generation, and projects do require a considerable upfront investment as well as a degree of specialist expertise if firms are to take on the construction and operational risks associated with a new installation.
In addition, it is a rare business that can meet all its power needs using onsite generation alone.
Private wire arrangements
Companies with large energy requirements can also opt to build larger scale renewables projects near to their sites - or work with partners to do so – and establish an exclusive or private wire to connect to the new wind or solar farm.
The approach is relatively rare, as firms need the combination of a significant energy requirement and a suitable nearby location to build a full-blown renewables project. But a number of industrial firms have adopted this approach, attracted by the ability to access significant quantities of low cost clean power.
As explored previously, PPAs provide visibility and transparency over a firm’s electricity supplies that other options do not, offering security of supply, reduced price volatility, and long-term transparency and certainty about the cost of energy. They also provide price stability, both for the project developer and the offtaker. For example, in the face of skyrocketing European energy prices, US aluminium producer Alcoa, whose energy use accounts for 60 per cent of its production costs, has recently signed a deal for 573MW of wind capacity in Spain.
PPAs also enable buyers to know for sure whether or not their investment is “additional” – that is to say is it adding to total renewable energy capacity and enabling projects that would otherwise not have happened.
As such, they help companies provide transparency and traceability on how they are meeting their emissions reduction targets.
However, any long-term contract comes with a degree of complexity and risk. Companies could find themselves locked into higher prices if wholesale power prices fall in the future – a scenario that looks increasingly unlikely in the current climate, but can’t be ruled out.
There are also a host of inter-related risks associated with procuring power. Will projects be built on time, will they deliver promised levels of power, what happens if a generator or customer runs into financial difficulties? Well-structured contracts can address these risks, but they need to establish clear responsibilities and liabilities. Plus, insurers are starting to offer products to address some of the potential issues. Squeaky, for example, is developing a product for generators, insuring them against their corporate customers going out of business.
There are a number of different types of PPAs:
A number of renewables developers offer to install and then operate and own renewable energy technologies on a clients’ property. The developer then sets up a PPA with the buyer for anything from 10 to 30 years, depending on the type of contract.
The third-party developer will usually build, own, operate, and maintain the installation and so assumes more of the project risks involved, according to energy procurement platform Flexidao. Companies get the reputational benefits, carbon savings, and a chunk of the cost reductions associated with on-site renewables, but without the upfront capital investment and project management requirements.
The flipside of such on-site PPAs is that the cost savings will be lower than if a company installs and owns the technology itself, plus it has to negotiate a long-term contract that create challenges in the event the business relocates or closes down.
Virtual PPA
Rather than companies directly buying power from a developer or single project, the developer sells the power into the spot market and the offtaker receives the clean energy certificates that are created by the electricity generated, enabling them to claim that power as their own.
Some critics argue that they do not offer true additionality – Bowden says that “if you are in the market just to hedge your power exposure, do a virtual PPA. But if you are in the market to meet net zero targets and secure future sources of green power, you need to do a physical PPA”.
Virtual PPAs, like their physical counterparts, allow buyers to cut costs by signing up to a long-term contract but they are more straightforward to arrange for buyers, although they may lead to accounting complexities in European markets. Virtual PPAs also allow buyers to avoid many of the risks associated with buying power, because the utility – which has much more experience and expertise at buying power – takes on many of those risks.
But in the US some large corporates are seeking to get round this problem by using their negotiating clout to set up new physical PPAs and then pooling the resulting power into virtual PPAs that can be sold to partners in their supply chain.
The arrangement gives developers the long-term revenue certainty they need to proceed with new projects, while smaller firms in the corporate's supply chain get access to PPAs that are more competitively priced than they could otherwise access, and the corporate gets to reduce emissions and costs across their supply chain.
In addition, aggregating demand in this way can allow generators to include different demand profiles in a PPA to make it easier to match demand with supply, while also allowing them to diversify the risks associated with supplying just one buyer.
These are simple to sign up to, making them suitable for any company that is looking to cut their emissions and boost their sustainability efforts but lacks the resources or expertise to sign up to a PPA or deploy a solar array on their roof.
However, many experts argue green tariffs should be seen as a first step rather than the final word in clean energy procurement. Critics argue that green tariffs vary massively in terms of quality, with many such tariffs struggling to provide real additionality. Buyers are often simply purchasing clean power from their utility that they would have generated anyway and purchasing a certificate to show their energy use is matched by clean power generation somewhere.
As such green tariffs are better than standard tariffs and the better deals do allow businesses to reasonably claim they are using clean power, but for firms that want long term price stability, maximised cost savings, and a direct boost to the net zero transition on-site generation and PPAs can be a better bet.
“Suppliers want to move away from pricing small to medium PPAs manually. They are so transactional – you don’t need data scientists or analysts to decide what to charge. We’re trying to get pricing to be an automated process.”
Moreover, in many markets, direct corporate purchases of clean energy are simply not an option, especially in Asia and parts of Eastern Europe. But the situation is changing slowly, Harrison says, as more projects come online and corporate demand for clean power grows. For example, South Korea created a renewable energy certificate market for corporates in 2021 and utility Kepco has a green tariff programme.
By acting together in a collaborative approach, these institutions, whether large or small, have been able to navigate a previously inaccessible market
“By acting together in a collaborative approach, these institutions, whether large or small, have been able to navigate a previously inaccessible market,” Murphy added.
The creation of standardised and simplified documentation that cut the size of the contract down to a previously unimaginable 15 pages, lowered transaction costs to an affordable level for the universities.
“Until now, the cost and complexity of arranging CPPAs meant their advantages could only be enjoyed by large corporations that had the in-house capability and resources needed to negotiate these agreements that typically ran to 120 pages,” said Richard Murphy, managing director at TEC. “Additionally, there was little appeal from the other side of the equation – generators – to strike a CPPA with smaller organisations as the scale of any deal was always too small.”
Squeaky Energy and The Energy Consortium (TEC) helped 20 leading UK universities to join forces and sign an aggregated corporate power purchase agreement (CPPA) that saw them buy £50m of renewable energy from a portfolio of wind farms owned by Statkraft over a 10-year period. The deal, signed in 2019, offers the universities, including Newcastle, Exeter, and Aberystwyth, fixed power prices for a decade, minimising their exposure to market volatility.
Case studies - UK universities embrace clean power
Google is taking advantage of the falling price of renewable energy and storage, as well as using tools such as reverse auctions and developing new transactional approaches, such as: moving from single-source PPAs to multi-source and multi-technology blended PPAs; creating utility programmes to enable broader access to affordable clean energy; and developing new models where multiple users can share clean energy assets.
It will also explore the use of new technologies such as green hydrogen, advanced nuclear power, enhanced geothermal and carbon capture and storage. In addition, it says that “our new carbon-intelligent computing platform shifts certain non-urgent jobs at Google data centres to times when low-carbon power sources, like wind and solar, are most abundant on regional grids. In the future, we expect to expand the program to also shift computing work across different data centre sites.”
Case studies: UK universities embrace clean power
Case studies: UK universities embrace clean power
How leading firms are accelerating the transition to 100 per cent renewables