Power and renewables

5 things Europe can learn from the American PPA market

5 things Europe can learn from the American PPA market

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Ken Elser

Ken Elser

Head of Department, Project Financing and M&A

North America is years ahead of Europe in adopting corporate power purchasing agreements (PPAs). As a result, the North American PPA market dwarfs its European counterpart. But following a breakthrough year in 2019, the European PPA market is set to take off. Here are 5 lessons that it can learn from North America’s journey.

Massive growth is possible – but takes experience and education
More than 20 GW of PPAs have been signed by corporate and industrial offtakers in North America over the last 4 years. This growth has been pioneered and driven by the big tech sector, which accounts for over half that volume. It is being further fostered by trends towards corporate decarbonization and environmental, social and governance (ESG) investment.

But we have seen that it takes time to negotiate a (virtual) PPA. Many corporate boards and sustainability groups are not familiar with PPAs and their language. Often there are legal issues around accounting that need to be addressed before these bodies can become comfortable with the concept of a (virtual) PPA. So, expect to have to invest some time and effort before you can seal the deal.

Corporates are more particular than utilities
Corporate offtakers have much more specific requirements than the utilities that electricity generators are used to dealing with. And that can affect the complexity of any contract signed. Corporate buyers often want to match energy supply to specific loads, creating demand profiles that may favour either wind or solar, and will dictate the contract volume and settlement arrangements. They are often also looking for power that is “firmed and shaped”, which may require hedging or sleeved arrangements to balance actual production against real-time demand. Moreover, corporate buyers are typically focused on new projects (additionality) and those that are as close to their operational locations as possible.

Investors look at buyers’ credit ratings
Different corporate offtakers have different credit ratings. These ratings are a key consideration for investors when making investment decision about renewable energy projects with corporate offtake. If buyers’ credit ratings aren’t sufficient, projects may need to put in place more security or accept other mitigation measures when trying to secure financing. Low buyer credit ratings can also impact a project’s sale price.

Increasing risk for projects
The nature and expectations of corporate offtakers mean that renewable energy projects have to take on more price and operational risk.

Unlike traditional utility PPAs, corporate PPAs usually require that the settlement point is a liquid energy trading hub (i.e. a hub with a lot of trading activity). Such hubs are normally located closer to load centres and may be geographically distant from the renewable project. In nodal wholesale markets, this leads to different spot prices at the delivery point (hub) and the project’s point of interconnection with the grid. Corporate buyers expect the project to take on this “basis differential risk”, which can impact the project’s cash flow—sometimes severely.

Similarly, corporate buyers typically see projects as service providers who are contracted to deliver electricity as agreed. Therefore, buyers are less likely to accept risk associated with factors such as plant availability, performance and efficiency This can lead to the project facing novel or onerous restrictions on, for example, the timing and duration of shutdowns for maintenance or having to accept less favourable contractual terms for excusable events, etc. These provisions can in turn have implications on financing.

The rise of insurance
As with any large infrastructure project, new renewable energy plants come with inherent risks. Allocating those risks is a key part of PPA negotiations, but usually all parties have to take on some risk and consider the best way to manage it. In response, the American market is seeing a growth in insurance products for renewable offtake, including in the context of corporate PPAs – particularly as a backstop for weather risk.

Want to know more about what Europe can learn from the growth of the North American PPA market? Listen to the Instatrust webinar from April 2020. Instatrust is a digital marketplace that connects renewable energy buyers and sellers to make the corporate PPA process faster, easier and more transparent. For more information, please contact Caroline Brun Ellefsen, Global Head of Instatrust.

Contact us:

Ken Elser

Ken Elser

Head of Department, Project Financing and M&A