In an evolving energy landscape across the UK and Europe, Power Purchase Agreements (PPAs) are an increasingly popular mechanism to helping corporates secure renewable energy volumes at a convenient and stable price over time. PPAs represent a direct means to acquiring renewable energy certificates bundled within the electricity contract itself. Importantly, they represent a useful mechanism to supporting progress against sustainability targets in terms of carbon emission reduction – particularly for corporates with sizeable electricity consumption. The last 18 months has been a busy year for our PPA Advisory Team. For corporates with consumption across mainland Europe in particular, navigating a complex and volatile market has been particularly challenging. Head of PPA services Katharina Winter, shares her main observations based on market developments during this time, and provides advice for corporates aiming to secure a PPA.
Despite recent price decreases, power prices will remain high
The policy support that has been put in place by governments has seen energy prices ease in the near term, but Katharina shares that “relatively speaking, prices are still considerably higher than 18 months ago. With no clear solution in place to guarantee security of supply moving forwards, the market will remain volatile, and prices will suffer as a result.”
Katharina notes that where energy-intensive industrial players are affected by gas supply constrains in markets such as Germany, we are seeing huge demand for PPAs, but there is a potential undersupply of renewable energy projects during the next years. We certainly see options for corporates considering assets that are nearing end of life. However, this is not a solution for the greatly sought-after criteria for credible sustainability claims, namely the additionality requirement (i.e., to add more renewable energy capacity to the grid via funding newly commissioned projects).
Transitioning to renewable energy remains a key focus
Transitioning to renewable energy, supporting science-based targets and net-zero ambitions remains a key strategy pillar for many corporates. This is reinforced across a range of industry reports and reflected in company disclosures. Combined with the increasing requirement to report on sustainability risks via frameworks such as TCFD, we do not anticipate emission reduction targets taking a back seat anytime soon.
Many corporates with operations in Europe have interim targets for 2025 and according to current renewable energy developer pipelines, commissioning dates are currently sitting around 2024-2026, meaning that the pressure is on for many to secure contracts as soon as possible. Furthermore, those already claiming 100% renewable energy through certificate purchases are looking for a more commercially sustainable option for the long term. Demand-led price fluctuations in the certificate market, plus the additional costs associated with so-called ‘unbundled’ certificate procurement creates added price risk and expenditure corporates are keen to move away from in the longer term.
Demand is sky-high
The above factors have culminated in an increasing demand from corporates to offtake renewable energy and last year we saw demand clearly outstripping supply. Katharina notes that if we look back, before Q1 in 2020 developers were actively selling their project pipelines to corporates. This dynamic has been changing over the last years and took a dramatic shift in 2022, with corporates now vying for what has become a very limited supply. This shift has impacted market dynamics considerably, giving sellers of renewable energy the ability to cherry-pick the off takers that represent a smooth contracting process and a safe pair of hands.
This pronounced shift from a buyer’s to a seller’s market means we are seeing the need to ‘sell’ our corporate buyers as attractive off takers to the developers. It is becoming a really competitive space whereby certain corporates are getting prioritized, namely those with larger demand, a solid credit rating, prior experience of closing PPAs and able to act quickly.
– Katharina Winter, Head of PPA Services at act renewable
What does the near future hold for the PPA Market in Europe?
PPA structures provide price stability, which is valuable to corporates, and so we expect to see a strengthening demand, particularly in countries with heavy industry and dependence on gas imports such as Germany, Austria, Italy, Poland, Czech Republic, or the Baltics. When approaching the PPA market corporates should bear in mind that they will likely be competing against utilities and high-energy consuming industrials well-practised in hedging energy procurement.
We will also see developers take advantage of their current market position with new procurement structures such as participatory tenders and later commercial operation dates of the renewable energy asset. In terms of dealing with corporate off-takers, developers are increasingly reluctant to pay success fees to intermediaries and provide speculative offers to corporate off-takers ‘testing’ the market, which has been common practice in previous years.
Our advice for corporates entering the renewable energy PPA market:
- Ensure that you have a clear procurement strategy for PPAs, starting with the basics of stakeholder alignment. We can’t emphasize enough how important it is to have a common understanding of what a PPA will mean for different business functions. Procurement, finance, legal, and Sustainability all need to input into what is the acceptable risk from the start.
- Beyond alignment, undertake scenario planning to enable a quantitative assessment of price tolerance; this helps to refine the procurement strategy with a clear view of what pricing, structures and tenors etc. can be accepted by the business and where to draw the line.
- Be clear and precise with requests to the market – corporates should consider the position of a developer when launching the tender. Requests for pricing with a clear scope, which demonstrate preparation, understanding, and ultimately demonstrate confidence to proceed are more likely to yield responses.
- Be open to alternative procurement routes offered by developers. These could include bilateral negotiations, tenders, and other new structured offerings emerging from the developer market.
Want to know more?
At act renewable, specialise in supporting corporates reduce their carbon footprint across their entire value chain through transitioning to renewable energy.
We work with multinational clients across a wide range of stakeholders, offering a series of services based on understanding the needs of our clients in the transition process, and our knowledge of the market opportunities available.
Our PPA team has over 15 years of experience on both advisory and sell-side expertise, we have supported numerous companies reaching the level of maturity and expertise to be able to negotiate and secure a best-fitting PPA.
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