Energy transition report

Beyond renewables

Roundtable: Inflection point

Wrong policy, right time?

It’s all in the service agreement

The importance of pro-active management

The state of Iowa is typically known as the platform for triumph for any aspiring US presidential candidate. Yet the battleground state has also been the springboard for the success of the corporate power purchase agreement market since Google arrived in 2010 to complete a 20-year PPA for NextEra Energy’s 150MW Story County II wind farm.

What was then a niche move in the energy market in Iowa by a search engine giant has now become a key cog in the machine for renewable energy asset owners globally, providing long-term stability against merchant power prices.

Google and fellow pioneer Walmart were soon joined by other tech giants such as Apple, Facebook and Microsoft, with the sector’s combined data centre and corporate responsibility requirements edging them towards procuring the US’s growing renewable energy capacity.

Within a few years, corporate PPAs had gone from powering just a few hundred megawatts of US renewables to more than 4GW, according to Bloomberg New Energy Finance. While the tech titans and the US remain the leading drivers of the market, corporate PPAs are now used to power Mars bar factories and IKEA furniture stores. It’s not just in the US either: Europe signed more than 1GW of PPAs last year, India has signed almost 3.2GW since 2008 and 2017 saw the emergence of such deals in Burkina Faso, Eritrea and Namibia, BNEF says.

 

 

GROWING PAINS

Despite a slight dip in the volume of corporate PPAs signed in 2016, this remains a booming market. While Google and Walmart set the wheels in motion almost a decade ago, some 76 percent of deals have been signed since 2015, according to BNEF.

However, this is still largely taking place in the US, despite the progress made elsewhere. The renewables industry has called the European Commission’s Renewable Energy Directive “insufficient” in helping to promote corporate PPAs; in fact, it remains a “grey area” as to whether corporate PPAs are even legal in Germany.

The UK is one market where progress has been achieved with corporates, albeit to a limited degree. The listed Foresight Solar Fund, which has a UK portfolio of more than 500MW, secured its first corporate PPA in the country last year for the 72MW Shotwick project, believed to be the UK’s largest operating solar site, although Ricardo Pineiro, who has led Foresight’s UK solar investments since 2011, expressed caution as to it being a market leader.

 

“I would say there are still more generators looking for corporate PPAs than corporates willing to write them”
Pineiro

“It was an interesting one,” he muses. “The solar park is right next to a [Finnish paper mill group] UPM facility and that helped to enter [into] that corporate PPA because we’re literally next door. It’s not your traditional fleet PPA. I would say that was more opportunistic than anything else, rather than a pure corporate PPA. We do expect the market to pick up considerably in the upcoming years.”

 

Where the bulk of European achievements in this market have been made is in Scandinavia. Last year, Norwegian aluminium group Norsk Hydro signed up to buy the power from GE and the Green Investment Group’s 650MW Markbygden wind farm, in Sweden, the largest corporate PPA in the world. A more unique structure in Norway also emerged in 2017, through which Alcoa, another of the country’s aluminium groups, agreed a PPA for the 281.4MW Nordlicht wind farm, owned by Siemens Financial Services and German pension group Ärzteversorgung Westfalen-Lippe. The contract was for the first time guaranteed by the Norwegian Export Credit Guarantee Agency, a crucial mechanism to bring the deal to an AAA rating, with Alcoa at the time rated BB-.

 

 

Foresight last year signed Spain’s first corporate PPA and is close to signing a second and Pineiro explains the fund wants similar guarantees for its own deals.

“We are trying to identify corporates with attractive credit ratings,” he says. “We’re a little flexible in markets like Spain but definitely investment-grade. Also, we always have to do a bit of analysis on the strength of the company’s balance sheet.”

 

POWERING AHEAD

In a renewables industry where subsidy-free is on its way to becoming the norm, corporate PPAs will be increasingly looked for as a way to satisfy the previous guarantees offered by subsidies. However, key questions remain about the structure of such products.

“More liquidity and standardisation will help,” says Marcel Galjee, energy director, industrial chemicals at AkzoNobel. “The duration of the contract plus the underlying commitments and securities are important to reach an agreement in the negotiation process. This is where the industry can play an important role; we are used to longer contracts and therefore able to give a security to the developers and financiers.”

According to Pineiro, though, this is easier said than done.
“Corporate PPAs are more challenging in the sense that each corporate might have their own requirements,” he explains. “They have their own objectives they are trying to achieve and that makes it a more complex process. Also, at the moment I would say there are still more generators looking for corporate PPAs than corporates willing to write them. It’s a new market really that we’re trying to create.”

That’s not to say that corporates cannot work together in this area. One of the most noteworthy innovations Europe has brought to this market is the Dutch Wind Consortium comprising AkzoNobel, DSM, Google and Philips, working together to jointly negotiate PPAs.
“[Corporates] could learn from and strengthen each other as we have seen in the consortium approach,” says Galjee. “We all bring our expertise and create more opportunities by joining forces than competing.”

The approach sounds ideal. The practice might take a period of fine-tuning as the world plays catch-up with the US.