How do Corporate PPAs Work?

The drive towards a future of renewable energy continues apace. Numerous incentives have been introduced to hasten this transition, and one that businesses can take advantage of to boost their bottom lines and green credentials is the Corporate Power Purchase Agreement or CPPA. 

What are Corporate PPAs?

A Corporate Power Purchase Agreement (CPPA) is a long-term agreement between a large business that consumes electricity and a renewable energy generator. In this agreement, the business agrees to buy some or all of its electricity directly from a renewable energy generator, such as a solar or wind farm connected to the national grid. 

How Corporate PPAs Work

A Corporate Power Purchase Agreement is an agreement between a large business that consumes electricity and a renewable energy generator. 

Under a CPPA, your business agrees to a contract with the wind farm's owner to purchase electricity generated by the farm for 10 to 15 years. The CPPA involves no physical connection between your commercial premises and the wind farm. Instead, the wind farm feeds all the electricity it generates onto the national grid.

Your business continues to use electricity from the same grid, with a business energy supplier acting as an intermediary, off-setting the electricity generated from the wind farm and supplying electricity to your company.

If you’re purchasing electricity with a PPA, you’ll pay the supplier for the wholesale purchase of electricity at the rate agreed in the PPA. You pay the business energy supplier for the distribution and transmission costs associated with using the national grid to deliver the electricity to your commercial properties.

The CPPA enables your business to advertise that it uses renewable energy from a specific source and allows you to claim all of the carbon credits associated with the renewable project.

Utility vs Corporate PPA

It is important to differentiate between a utility  PPA and a corporate PPA. A utility PPA is a structure where a power supply agreement is concluded between a power producer and a utility company (UC). In the case of a corporate PPA, however, a PPA is concluded between a power producer and a company that is the end consumer.

Utility PPAs are usually characterised by shorter contract periods compared with corporate PPAs. With utility PPAs, UCs do not consume the electricity themselves but sell it to their customers. Particularly important with PPAs is the differentiation between their various types. For example, there are physical and virtual PPAs and further subdivisions beyond this. 

Benefits of Corporate PPAs

There are three main benefits to entering into a CPPA: 

Financial advantages

Because of their long contract term–often in excess of a decade–CPPAs offer financial protection for your business by providing a stable, predictable price for electricity over a long period, often lower than the current business electricity prices available on the grid.

Sustainability impacts

CPPAs can significantly reduce energy use. Consumers are becoming more aware that greenwashing is an issue. A CPPA overcomes this by providing traceability and authenticity of your renewable business energy supply, so not only are you making a difference, but you can also demonstrate it. 

Risk management

Over the last few years, price volatility has been a significant issue in UK wholesale energy prices. Businesses that consume large quantities of electricity can be severely affected by unanticipated upturns in energy prices. A CPPA can be a key component of an energy price risk hedging strategy.

Considerations and Challenges

A CPPA is a significant long-term commitment for both ends of the contract. It, therefore, pays to the considerations and challenges of Corporate PPAs before entering into any legally binding agreement. 

There are four main risk areas to consider: 

Price risk

If the price of electricity falls below the agreed-upon price in the PPA, the buyer may end up paying more than they would have if they had purchased electricity from the open market.

Performance risk

The generator may not be able to produce the agreed-upon volume of electricity, forcing the buyer to purchase electricity from another source at a higher price.

Contractual risk

There is a risk that the terms of the PPA may not be properly understood or enforced, leading to disputes between the two parties. Ensuring that all parties in the agreement are creditworthy is vital.

Legal risk

You need to ensure all contract clauses address scenarios like underproduction by the renewable project, dispute resolution and 'force majeure events', certain acts, events or circumstances beyond the control of whoever signed the agreement, such as natural disasters or worldwide pandemics. You must also understand the potential implications and costs of terminating a CPPA before it expires.

Steps to Implementing a Corporate PPA

There are three essential steps to implementing a corporate PPA:

Identify suitable projects

Not all projects may be suitable for a corporate PPA, so it’s important to identify those that may be. A full energy audit is an excellent place to start. 

Negotiation and agreement

Once you’ve identified a suitable project for a CPPA, it’s time to review your options in the marketplace. A broker may be able to help with this. Remember to consider all factors that could influence your decision. How long is the contract term? What is the price? What are early termination terms like? There are a wealth of questions to ask. 

Monitoring and management

When your CPPA is in place, you’ll need to monitor its efficacy. High-tech solutions such as Energy Management Systems can help with this. 

Can CPPAs Significantly Impact Renewable Energy Adoption?

The growth of renewable energy sources is vital for a sustainable future. Corporate Power Purchase Agreements serve as a mechanism for expanding renewable energy by providing financial security to its generators, which encourages development, creates jobs and drives economic growth. A carbon-free world is less attainable without PPAs.

CPPAs benefit everybody. They allow renewable energy companies to secure long-term contracts to sell their electricity, providing them with a stable source of revenue and helping them finance new projects. They also offer price stability and a way of demonstrating green commitment and credentials to the outside world. As a critical part of the fight against climate change, perhaps it’s time to consider whether one might suit your business.