Post: Managing risks with a corporate power purchase agreement

Managing risks with a corporate power purchase agreement

Energy-intensive industries across the globe are experiencing one of their most difficult periods in recent memory, facing a host of overlapping challenges that impact their cost of operation and competitiveness for the future:

• Record energy price increases
• Unprecedented price volatility
• Insecurity over energy supplies
• The risk of enforced downtime, with the resultant productivity loss and possible damage to equipment
• Increasing pressure to come up with a workable net zero strategy and take action to reduce emissions

What if there was a way to cover your business power demand with renewable energy at a sustainable price? The good news is that there is, it starts with how and where you purchase your energy and GridBeyond can support your business to gain long-term control over the energy market with a green corporate power purchase agreement (CPPA).

What is a CPPA?

CPPAs offer a long-term supply contract of renewable power at a fixed price between a generator and an energy buyer (offtaker), giving you certainty on both your cost of power and its origin. Corporates have a variety of different drivers for looking to source power from renewables, but the possibility to lower and fix electricity costs is a major part of the rationale for these deals.

Benefits of a CPPA

For an energy buyer a CPPA can fix energy costs for the long-term and enables a company to (indirectly) fund a renewables project and receive “green attributes”, such as Renewable Energy Certificates, supporting decarbonisation and sustainability goals.

Sustainability is increasingly important to all organisations. From 6 April 2022, mandatory disclosures of climate-related financial information for over 1,300 of the UKs largest businesses has enhanced the importance of decarbonising for corporates. Corporate PPAs allow businesses to lower their overall emissions by arranging long-term supply agreements directly from renewable or low-carbon energy sources, such as wind, solar or biogas. This increases the proportion of renewable power in an organisation’s energy mix supporting the sustainability agenda, reducing the need to purchase carbon permits and can also result in a commercial and reputational advantage.

For a renewable asset owner/developer: A PPA allows renewables projects to increase their level of revenue certainty. Normally, this would not be possible in fluctuating energy markets in absence of a government incentive. This enables the financing of their renewable project by lenders and reduces risks by efficiently allocating them among the contractual parties.

Risks of a CPPA

As many renewables are intermittent and depend upon the weather conditions, variations in weather or other factors can bring some risks for parties involved in a CPPA:

• Shape or profile risk – Hour-to-hour generation will be variable depending on wind speed or solar radiation, even if the overall volume over a sufficient period of time equals the estimated volume. Against this generation profile, the demand profile of a corporate buyer is likely to be flatter, with a pronounced variation between business and non-business days.
• Volume risk – This is the variable generation of an asset over a period of time (usually a longer period than when discussing shape or profile risk). This variability derives from variations across that longer time period, such as higher than expected wind over one year or lower solar radiation levels due to a poor summer, which could result in volumes not being produced.

When combined these risks result in a balancing risk. This concerns the risk of exposure to power system costs that arise when an asset’s forecasted generation is different from its actual generation.

The rules relating to the potential liability of an asset’s exposure to power system costs differ between markets. But generally, the more an asset contributes to the power system’s imbalance, the higher the imbalance cost. And the more the generation profile of an asset correlates with the market-wide generation profile of its technology, the more the asset’s imbalance correlates with the overall power system imbalance, resulting in higher imbalance costs. In short: asset generation profile and location matter when quantifying an asset’s imbalance risk.

What can be done to manage this?

Shape or profile risk – The demand profile is usually more stable than the production profile. Usually this risk is allocated to the corporate buyer under a CPPA and the offtaker acquires any missing volume from the market. Under the CPPA, a third party may also take responsibility for providing the missing electricity in order to manage this risk.

Volume risk – Where a PPA is based on a fixed volume delivery to the offtaker, the generator bears the risk. With a pay-as-produced PPA, the offtaker bears the risk, however, this may be mitigated through the use of a sleeving agreement with an electricity supplier which may then cover any shortfall.

Balancing risk – Balancing in GB is done by Elexon in accordance with the Balancing and Settlement Code (BSC). There is, however, no restriction on either party to a CPPA acting as balancing party. As the costs of balancing energy following under or over delivery may be high and may, therefore, significantly increase the costs of the party bearing that risk, a party which is better placed to bear this risk should be selected. This may be the case if, for example, it has existing energy sources which can be used for correcting the imbalance in its portfolio.

As part of our AI-driven multi-service CPPA solution GridBeyond uses monitors site energy demand and green generator production on a sub-second basis to trade imbalance in short term market or use load, batteries and gensets to compensate for imbalance, allowing you seamlessly execute a comprehensive energy trading and demand response strategy, 24/7/365 helping your business to offset the risks involved with a CPPA.