Aggregation key to unlock corporate PPAs: WFW

Aggregating electricity demand from small and medium-sized enterprises (SMEs) has been identified as the single most important factor to unleash growth in corporate power purchase agreements (CPPAs), international law firm Watson, Farley & Williams (WFW) said today in a report on renewable energy.

The report was based on interviews with 150 senior level investors, financiers, developers and power producers in Europe and southeast Asia. Around 62pc of the European respondents consider the lack of power generators offering CPPAs that are suitable for SME offtakers as the main reason for lower uptake in that market.

Most renewable projects have capacities far exceeding the demand of individual SMEs, and potential costs and complications prevent generators from entering a large number of separate CPPA negotiations.

This has led to generators signing CPPAs with just a few major companies like Google, Amazon and Unilever, or agreeing long-term PPAs with a limited list of utilities, which then sell the electricity to several corporate buyers.

But while the latter has been a stable and growing market, the scope for significant increases for such contracts is viewed as relatively limited compared to that for the young CPPA market, WFW said.

This is more so as an increasing number of corporates now have internal "additionality" requirements — meaning they need to demonstrate that the PPAs they sign lead to the development of new renewable projects that would otherwise not be built. In other words, corporates would ideally offtake directly from the projects and not from utilities.

"An effective and broadly applicable aggregation model is urgently needed if CPPAs are truly to fulfil their potential," WFW senior associate James Harrison said.

One of the main aggregation models is the offtaker-consortium structure, whereby several buyers group together to benefit from a PPA. Norwegian state-owned utility Statkraft has recently entered into one such aggregated CPPA, through which it will supply electricity from its existing UK onshore wind assets to a group of universities.

A significant volume of corporate demand would not be accessed directly by renewable generators until in some way aggregated, WFW said.

There are challenges ahead though.

"Aggregation as an issue is only going to get more acute as the pathfinder corporate offtakers like Google and Facebook satisfy their immediate demands for power and take a step back from the market," Harrison noted.

Also, consortia are usually difficult to achieve as they require the formation of a stable partnership between like-minded members. SMEs could find it particularly hard to agree to the same power procurement and price conditions as their competitors.

"It remains to be seen whether consortia can function effectively with significant numbers of members," WFW said.

But the growth of energy aggregator LevelTen Energy in the US market suggests that a model of syndicated offtake may be feasible in Europe, the law firm noted.

The model would see a single aggregator negotiate a PPA structure with a generator for all or part of its project's output, take the PPA structure to market and fill it with a syndicate of offtakers. The aggregator would also be able to manage the syndicate, transferring offtakers in and out of it, over the life of the renewable project.

"Syndicated offtake is an enticing possibility," WFW global energy sector co-head Henry Stewart said. "In theory, the aggregator in that model would not even need to be an existing participant in the electricity markets."