With increased global focus on climate action and proposed Irish legislation promising to introduce more definite and ambitious sectoral targets of de-carbonising the economy, it is anticipated that Corporate Power Purchase Agreements (PPAs) will become increasingly prevalent in the Irish energy market.
At present about 40% of electricity used in Ireland per year comes from renewable generation. The Irish Government has set a target of increasing this to 70% by 2030 as part of its Climate Action Plan. The development of renewable energy facilities will be key to achieving this. The use of Corporate Power Purchase Agreements (PPAs) to power business has been on the increase in recent years particularly in the renewables space. In this article we explore how Corporate PPAs might assist in removing obstacles to financing and building new renewable facilities which will be key to achieving Ireland’s climate action targets.
What are Corporate Power Purchase Agreements (PPAs)?
A Corporate PPA is a long-term contract pursuant to which a corporate agrees to buy electricity from an energy generator at a fixed price. In the wind energy industry for example, a Corporate PPA refers to a PPA between a wind farm and, usually, a business that uses a large amount of electricity such as a data centre or pharmaceutical and high-tech manufacturers. There are also examples in Ireland of PPAs being entered into by groups of smaller businesses or companies whose power demands may not be so high, but they have a desire to contribute to climate action by “going green”.
How are they Structured?
Corporate PPAs can be structured in several different ways and the structure used will typically depend on the relevant underlying regulatory regime. Internationally the main forms are “sleeved” and “synthetic” (or financial) PPAs. In Ireland there is an additional option of what is known as a “supplier-lite” structure.
A “sleeved” PPA (or “back to back” PPA) involves a direct agreement between a generator and a consumer for an agreed level of power output. The consumer sells all the power procured under the generator PPA immediately to a traditional utility under a second, back-to-back PPA. The utility runs the power through the grid, ‘topping up’ the renewable electricity with extra power if necessary, to satisfy the consumer’s energy needs and then sells the power back to the consumer. Typically, the consumer will pay a margin or a “sleeving fee” to the utility.
A “synthetic” PPA is essentially a contract for difference (CFD) between the generator and the corporate consumer. Under this structure, the generator and the corporate enter a direct financial hedging contract, such as a CFD (rather than a PPA). The corporate retains a supply contract with a utility, but contracts separately with the generator to provide a price floor for that generator’s output in return for the associated green rights. Under this system a wind farm for example sells its electricity on the wholesale market like any other generator. That power is bought, as normal, by an electricity retailer who sell it on to domestic and business consumers. If the wholesale electricity price is lower than what was agreed between the corporate and the wind farm then the corporate steps in to make up the difference. If the wholesale electricity price is higher than what was agreed, then the wind farm pays the difference back to the corporate. This is known as a Contract for Difference or CFD.
These arrangements have certain benefits for the consumer over the sleeved arrangements including that they are easily scalable, they can be highly flexible and being solely financial contracts, the consumer does not have to consider the technical or regulatory details of the generator’s project.
Another model commonly used in Ireland is what is known as the “Supplier-Lite” structure. Under this structure the consumer establishes its own licensed supply company (the Supplier–Lite) which enters a PPA with the generator. The Supplier-Lite passes the output through the Single Electricity Market pool and sells it to the consumer under an electricity supply agreement. The advantages of the Supplier-Lite structure include the fact that the Supplier-Lite is credited as having supplied the consumer with the relevant quantity of renewable electricity and the consumer has a hedge against market fluctuations and high energy prices.
