By Giles Dearden, Director of Global Due Diligence, and Christopher Renna, Business Development and Marketing Manager (France)
We recently attended Europe’s leading corporate energy procurement event, RE-Source 2018, which took place in Amsterdam on 20th and 21st November. The event has doubled in size this year with more than 800 attendees, including at least 100 offtakers.
PPAs are going from strength to strength, and the event provided the ideal occasion for renewable energy buyers and sellers to connect. The busy schedule featured a number of topical areas including corporate sourcing strategy and business models, markets and regulation, onsite generation and energy storage, finance and bankability, financial innovation and risk mitigation, as well as a view beyond Europe.
With such a packed agenda, we wanted to summarise the content into some key points.
1: We’re not there yet, but there is a path forward for Corporate PPAs
We are currently a long way from a liquid corporate power purchase agreement (CPPA) market. Supply far outpaces demand at a European level, and most CPPAs are bespoke and confined to individual countries, making the transaction costs higher when you factor in matchmaking, contract negotiations and coordinating complimentary sleeve or insurance structures. They also take too much time to initiate and conclude, averaging between six and twelve months. Fortunately these factors feel more like small hurdles on a roadmap to an inevitable future, rather than fatal flaws.
The EU renewables roadmap post-2021 requires generators to take more market risk. CPPAs fit this vision well, since they can balance the various parties’ risk ratios through contracts and complimentary products. Panellists and event participants debated various ways to reducing transaction costs. Between matchmaking, contract negotiations and standardised PPA contracts, online marketplaces, platforms for trading and futures market (such as EEX), and for Guarantees of Origin (GOs), cross-border trade (for both electricity and GOs), weather derivatives and aggregating PPA portfolios by location and technology seem to offer a variety of options to smooth export and hedging profiles.
2: Choose your risk profile
We’ve all heard how credit risk is bandied about as a limiting factor for off-takers, which is pertinent since it correlates strongly with the growth of the off-taker market. What’s receiving increased attention is volume risk. As more corporate players venture into renewable energy sourcing, they’ll have a steep learning curve on intermittency and the volumes that renewables can offer. This matters for the generator because missing volume requirements often come with painfully high penalties for a project – all the more reason to conduct rigorous due diligence in advance! Having a detailed and reliable monthly, as well as yearly, energy yield assessment and a technical audit of the construction and operational contracts so that you are properly covered in the event of a major component failure is vital.
So what about weather risk? Microsoft made a splash by announcing its recent success in signing PPAs can be put down to volume firming agreements that essentially de-risk the weather thanks to an insurance product. While this may be more applicable to the virtual PPAs* that we find in the US, there are solutions for banks to consider that apply to physical PPAs that are more typical in Europe.
3: Policy changes are needed to drive adoption
The EU and individual countries need to unlock and facilitate cross-border PPAs and their attendant Guarantees of Origin (GOs). On the latter, the Association of Issuing Bodies (AIB) is doing an excellent job in standardising rules of renewable energy origin. But many countries still have not resolved support of GOs with previous renewable energy policies and regulation. Once resolved, some will speculate that ‘Blockchain’ could be used to record, monitor and cheaply ease the flow of GOs.
Across Europe in 2018, Natural Power has provided technical and analytical advice to clients for five projects in three countries involving CPPAs. This includes the world’s largest single CPPA – the 650MW Markbygden wind farm in Sweden. We’re some way behind our Natural Power colleagues in the USA who have been dealing with CPPAs and hedge volume yield analysis for a number of years, but we’re on our way to closing the gap!back to news