Post: Exploring the CPPA landscape with Neil Garland: Insights and Outlook

Exploring the CPPA landscape with Neil Garland: Insights and Outlook

In recent years, the landscape of corporate Power Purchase Agreements (CPPAs) in Great Britain and Ireland has undergone significant transformation. As businesses increasingly turn to sustainable energy solutions, the role of CPPAs has become more pivotal than ever.

To delve into the current state and future prospects of this dynamic market, in this article GridBeyond’s Head of Origination, Neil Garland sheds light on the remarkable growth and evolution of corporate PPAs, the driving forces behind their adoption, and the emerging trends shaping the future of renewable energy agreements. He discusses the intricacies of the regulatory environment, the various models in use, and the innovative technologies that are revolutionising the sector.

Q: Can you provide an overview of the current state of corporate PPAs in Great Britain and Ireland? How have these markets evolved in recent years?

A: The PPA market in UK and Ireland is going from strength to strength. Not only has the number of deals significantly increased, but there has also been a shift in terms of who is doing them. In 2023, c~80% of all deals done (at the larger end) were by corporates with utility suppliers well in the minority. But as the market continues to mature, terms and conditions are becoming more standardised (although no truly standard CPPA exists as of yet), which means that the time taken to negotiate such contracts is gradually reducing.

Q: What is the future outlook for corporate PPAs in GB and Ireland? Are there any emerging trends or technologies that could significantly impact this market?

A: If the contracting process continues to simplify, I predict that we’ll not only see the number of CPPAs being secured increase exponentially, we’ll also see the contracted volume (i.e. in MWh) in CPPAs reduce. If the barriers to entry ease, this should make getting a CPPA more viable to smaller generators and corporate buyers.

As the cost of battery energy storage systems (BESS) continues to fall, we’re seeing an increasing number of collocated projects and hybrid CPPA’s (e.g. solar PV and BESS). Not only can BESS open doors to an wider range of revenue sources (e.g. Capacity Market, Firm Frequency Response and Balancing Reserve), but it can also be used to provide a more tailored export profile to a corporate buyer, by storing excess generation and discharging it when needed.

Q: What are the primary drivers behind the increasing adoption of corporate PPAs in GB and Ireland? Are there specific industry sectors leading this trend?

A: More and more businesses are coming to understand the inherent value of CPPAs. Whilst the majority will be using them as a tool attempt to deliver their net zero strategies, a significant number see value in being able to fix a proportion of their energy volume.

Energy costs can be highly volatile, influenced by fluctuating fossil fuel prices and geopolitical uncertainties. By entering into CPPAs, companies can lock in a portion of their energy costs at a fixed rate for the medium to long term, providing financial predictability and shielding themselves from market volatility. This stability is particularly appealing to large energy consumers who seek to manage their operational costs more effectively.

Additionally, corporate reputation and brand image are influential factors. Consumers and clients are increasingly favouring businesses that demonstrate a commitment to environmental stewardship. Companies that lead in renewable energy adoption can enhance their brand value and differentiate themselves in a competitive market.

In terms of industry sectors driving this trend, technology companies, financial services, and retailers are at the forefront. Technology firms, such as data centres and cloud service providers, are major energy consumers with a vested interest in sustainable practices to offset their significant carbon footprints. Financial services companies are also prominent, often driven by investor expectations and corporate social responsibility mandates. Retailers, meanwhile, are motivated by both customer expectations and the substantial energy demands of their operations, including logistics and large physical store networks.

Q: What are the most common types of PPAs being utilised in GB and Ireland (e.g., physical vs. virtual PPAs)? What factors influence the choice between these options?

A: The virtual/financial CPPA model is most prevalent in Ireland, whilst there is a more even split between virtual and physical sleeved CPPAs in GB.

In my opinion, the key factor businesses need to consider when deciding which model best suits them, is they are happy to commit to the additional reporting obligations that financial derivative contracts require.

Q: Can you discuss the typical pricing structures and contract terms seen in corporate PPAs in GB and Ireland? How do these compare to other regions?

A: Pricing structures and terms in GB and Ireland are broadly similar to other deregulated markets across the globe (including US and EU states). These structures and terms are broadly designed to balance the financial and operational needs of both energy producers and corporate buyers, while also promoting the adoption of renewable energy.

Typically new-build assets will require a long-term contract (i.e. 10 year plus) with a guaranteed price for generation and any associated benefits. Existing assets may be more open to shorter-term contracts and/or variable prices on account of having already made their return on investment. 

Q: How do companies manage the risks associated with long-term PPAs, such as price volatility and counterparty risk? Are there specific strategies or tools commonly used?

A: Having two parties willing to agree a fixed price for the full term of the CPPA. This fixed pricing mechanism provides insulation against market fluctuations, ensuring that the costs remain predictable for the volume supplied under the agreement.

There are several tools commonly employed for the purposes of managing counter-party risk, these include conducting thorough credit checks, provision of an Investment-grade Letter of Credit (LOC), Parent Company Guarantee (PCG), holding collateral in a bank account or securing credit insurance or a surety bond. By employing these strategies and tools, companies can effectively manage the risks associated with long-term PPAs, ensuring financial stability and minimising exposure to potential market and counterparty uncertainties.

Q: Which renewable energy sources (e.g. wind, solar) are most commonly featured in corporate PPAs in GB and Ireland? What drives the preference for certain types of renewable energy?

A: CPPAs allow businesses to lower their overall emissions by arranging long-term supply agreements directly from renewable or low-carbon energy sources and increases the proportion of renewable power in an organisation’s energy mix. This supports corporate social responsibility and sustainability goals, reduces the need to purchase carbon permits and can also result in a commercial and reputational advantage.

The most common type of renewable energy featured in CPPAs secured in UK and Ireland is solar, followed closely by onshore wind. There is a strong preference for some buyers to secure electricity from what they consider to be “true green” sources. This is over other forms of certifiably renewable power such as anaerobic digestion, biomass and energy-from-waste.  

Q: What are the main challenges and barriers that companies face when negotiating and implementing PPAs in GB and Ireland? How can these be overcome?

A: Credit, term and price.

When it comes to credit, not all buyers are able to satisfy the “investment grade” credit rating requirement (usually least “BBB+” or higher from S&P/Fitch or Baa1 or above from Moody’s.). Whilst there may be some flexibility offered by renewable electricity developers, an alternative solution for buyers is to contract with smaller and/or existing assets where the credit requirements may be less stringent.

Some companies are not comfortable with contracting for a 5/10/15 year term, although this is often a requirement when attempting to source from new build (‘additional’) assets. A solution for buyers is to contract with smaller and/or existing assets where a shorter-term deal may be possible.

Agreeing a satisfactory price for both parties can make or break a negotiation. If the developer of a new build asset doesn’t secure the minimum price he/she needs to meet their investment requirement, the project may not go ahead. Whilst the project should be priced on it’s own merits (technology, scale, additionality, profile and term), it still needs to be competitive versus the wholesale electricity market in order to attract buyers. CPPAs are often inflation-linked (e.g. CPI), meaning that the developer can recover additional value throughout the term of the contract, even if they have to accept a lower power price initially.

Neil Garland, Head of Origination, GridBeyond

Neil has worked in the energy industry for 16 years, including holding senior energy procurement positions at Hovis, JLR and Aggregate Industries, and as a retailer/consultant with time at e.on, ENER-G, Mitie, and most recently as Origination Manager at Good Energy.

At GridBeyond, Neil provides a link between renewables generators and energy buyers, supporting our clients in navigating the PPA market, identifying the most appropriate counterparties and ensuring that they receive the best revenues and savings from their agreements.