What you need to know before signing a corporate PPA

Amid spiralling electricity prices, an escalating gas crisis, and the ever-increasing likelihood (but uncertain nature) of carbon policy implementation, it is safe to say that Australia’s energy market is unpredictable at present.

In these times, the certainty offered by a corporate power purchase agreement (PPA) – a long-term arrangement in which power is purchased at a fixed rate directly from an energy generator – is understandably tempting for many largescale power consumers.

Corporate PPAs are playing a much larger role in supporting the continued growth of renewable energy in Australia. Consistent with international trends, corporate PPAs now represent around 50 percent of the PPAs (in terms of volume) being executed in the market.  This trend is expected to continue as the level of sophistication amongst corporates in procuring renewable energy directly grows.

Energy Action Chief Executive, John Huggart, says that, in addition to helping firms meet their corporate social responsibility (CSR) objectives, a PPA is a solid marketing tool.

“There’s no doubt that a corporate PPA is really cool for your brand. You have a photograph of your CEO, turning the soil for your company’s very own windfarm, slapped across the homepage of your website, with a caption that reads, ‘We’re committed to being a net zero energy consumer’. It’s attractive to an increasingly sustainability-conscious customer base,” he told Informa.

However, a PPA is not something to be undertaken lightly, and comes with as many perils as it does powers. Ahead of the Australian Power Purchase Agreements Conference, we caught up with John to identify some of the key considerations that all companies should make before signing on the dotted line.

Get lawyered up

“Most business and institutional clients are smart enough, sophisticated enough, and ‘lawyered up’ enough to make good decisions these days. But the question is, are you as ‘lawyered up’ as your counterparty?”, said John.

PPAs are incredibly complex and designed to manage a whole host of risks, including project risk, operational risk, contractual risk, regulatory risk, term risk, firming costs, counterparty risk and basis risk. Getting a foothold on these could mean the difference between being a ‘financial sinner’ versus a ‘financial winner’ within your organisation.

“The idea that you can get ahead of the regulatory curve with a PPA is appealing, but let’s not forget that somewhere amongst the fine print of your agreement there will be a detailed ‘change of law’ clause,” warns John.

“In addition, the complexities surrounding firming costs – pricing the energy for the customer when there is a mismatch of renewable energy generation and customer demand – can pose a commercial minefield.”

“You’ll need a top-of-the-range lawyer that can really interrogate the formalities and ensure that your company is fully hedged against the range of issues that could crop up throughout the term.”

Look ahead

PPAs inherently carry “term risk”, that is, the risk that comes with any form of long-term financial commitment. And with a ten-year lock-in being the norm, the ‘term risk’ of a PPA is quite substantial.

To offset this, John encourages proprietors and CEOs to interrogate the long-term vision of their company and really consider the interplay of factors which may affect its requirements for power in the future, in addition to the company’s long-term financial trajectory.

“Some industries are evolving by the nano-second, with factors like automation, outsourcing and the rise of the ‘gig economy’ all having an impact on everyday operations.

“You don’t want to be in a situation where a newly appointed CEO in five years’ time says, “Who on earth committed us to this agreement?” he warns. “In this regard, an astute and forward-thinking approach is key”.

Be mindful of politics

Political risk is less relevant to corporate PPAs than it is to other forms of contract. However, where politics comes into play is in the context of renewable energy pricing.

“The predictability of pricing is one of the major advantages of a PPA”, said John. “However, locking in a PPA at today’s wind or solar prices could turn out to be a poor financial decision, if the rate of deflation causes the procurer to miss out on tremendous cost savings over the agreement term.”

Carbon policy is one area of political instability which may impact renewable pricing over the coming years. The Paris Agreement, UN IPCC Report and the increased frequency of climate-induced weather events all point to the likelihood of carbon policy implementation. However, the timing and nature of policy is almost impossible to predict. It could be a case of carbon ETS like Europe, or a progressively rising coal tax as evident in South Korea and India.

Factors like this will have implications for the rate of renewable energy deflation, with a stricter policy no doubt elevating market prices.

In addition, John warns about the perils of counterparty risk, where developers may not remain viable in certain market or political conditions, potentially leaving a customer exposed. “Keeping abreast with political trends is important in determining the viability of your arrangement,” he said.

Consider the full suite of financial innovations

In addition to PPA solutions, innovation is also occurring in the form of new shorter-term hedging products.  For example, the Renewable Energy Hub has designed a traded solar hedge product that allows solar farm owners to forward-sell their expected production profile for a period of around twelve months. Procurers should, no doubt, consider the full suite of financial innovations.

Having said that, a corporate PPA does measure up well against its counterparts and ARENA (Australian Renewable Energy Agency) has done significant work to further encourage the uptake of this procurement model through the country.

In October 2018 ARENA announced grant funding of $500,000 toward the Business Renewables Centre – a $1.74 million project which helps Australian corporates and local councils to procure renewable energy through corporate PPAs. The initiative will establish an online resource centre and a marketplace platform, with an overarching mission to help Australian organisations procure 1GW of installed renewable energy by 2022, and 5GW by 2030.

John Huggart and ARENA’s Dan Sturrock will share further insights on this subject at the Australian Power Purchase Agreements Conference, due to take place 21-22 October, 2019 in Sydney.

Learn more and register.