Infrastructure

Expert's view

by Stéphane Dubos, Power & Renewables Infrastructure Industry Group, Natixis

Power purchase agreements – or PPA – have long been a driving force behind the development of renewable power infrastructure. These agreements enable power-generating companies to sell green electricity to the state and allow for steady volumes and selling prices, while also providing financiers and investors with a guarantee of recurring cash flows throughout the project.

However, we have witnessed the emergence of a new type of PPA over the past 10 years i.e. corporate PPAs, which are private agreements between a renewable power generator and a professional user.

An attractive alternative to sale to regulated grids for power-generating companies

This type of green power sale was previously absent from the French landscape: instead there were regular calls for tender, agreements were regulated and there was a purchase obligation system, so power generators did not need to use this type of system to sell green electricity. However, corporate PPAs are now gradually taking hold in the country.

These agreements provide an attractive alternative to selling to grids at regulated prices, in an environment where power-generating companies no longer need to take part in calls to tender to develop their business.

Technological progress has pushed down generation costs for renewable power infrastructure and subsidies are no longer required to ensure competitiveness. Previously, market prices alone without subsidies were insufficient to cover costs, so any projects that failed to be selected during calls to tender lacked funding. However lower costs now mean that developers can negotiate a corporate PPA bilaterally and without subsidies. If a company loses the corporate PPA, in theory it can then renegotiate another agreement with another counterparty and ensure the financing required to safeguard the project.

A way for buyers to make their power supply green

Companies purchasing electricity are increasingly looking to this type of supply method as it enables them to lock in guaranteed prices that are sometimes more competitive than on the wholesale market.

Corporate PPAs also have the added benefit of helping companies meet their CSR goals and their commitment to making energy supply more green. When companies sign a corporate PPA, the company that generates the green power provides a guarantee of origin, testifying to their financial contribution to the development of renewable power.

The RE100 initiative, launched at the UN Secretary-General’s Climate summit in New York in 2014, stepped up this trend, when 13 large companies – including GAFAM – pledged to switch to solely renewable power by 2050. This initiative now includes 152 companies worldwide, and corporate PPAs are a powerful way to meet this pledge.

This determination to contribute to the roll-out of renewable infrastructure explains why companies tend to finance so-called greenfield projects with fresh power generation capacities, rather than buying power generated by existing infrastructure: this is known as the additionality concept.

Adjustment in financing conditions

However, asset funding conditions are still more attractive on purchase agreements gained following a call to tender than under the terms of a corporate PPA. Corporate PPAs admittedly help secure financing for the project and also any equity fundraising more easily, but the length of purchase agreements is usually shorter, and this increases the project exposure’s to cash flow not covered by a contract over its duration. Meanwhile, counterparty risk is also higher with a private sector company than with the state. Banks therefore require termination clauses that factor in market price changes, while they also analyze the agreement’s competitiveness over both the medium and long term.

Next trend: the "pay as consumed"

Investors and financiers will also need to take on board the next upcoming trend on the corporate PPA market i.e. pay as consumed contracts. Contracts are currently based on the “pay as produced” principle as the buyer pledges to purchase all power generated by the infrastructure. This provides cash flow visibility and therefore acts as a guarantee for lenders and investors.

However we can expect a gradual shift towards pay as consumed contracts where companies only buy the volume they need. This type of contract does not yet exist, but a corporate PPA has just been agreed in the Netherlands based on a fixed volume, and this paves the way for flexibility on contract volumes. This means that the power-generating company will be responsible for managing its generation by developing storage technologies or finding another buyer.

This market change obviously leads to a merchant risk which needs to be taken into account in financing structures, so banks will probably require that a minimum volume be included in the agreement.


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