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Corporate energy sourcing: Direct investments vs CPPAs

16/11/2020

Locations

Belgium, Germany, United Kingdom

The market for renewable corporate power purchase agreements in Europe is expanding rapidly, but some end users are tempted to invest directly in developing their own electricity generation. Fieldfisher energy experts Daniel Marhewka, Lis Blunsdon and David Haverbeke weigh up the pros and cons of these two models.

 
Energy price volatility, increasingly punitive carbon pricing and climate change awareness have pushed clean power procurement up many European corporate agendas over the past decade, supporting a surge in renewable energy investment.
 
Trading green energy certificates, corporate power purchase agreements (CPPAs) and direct investment in generation assets are all popular ways for companies to reduce and offset carbon emissions.
 
Europe's market for green certificates is mature, and while it continues to grow, recently more attention has focused on CPPAs and direct investment opportunities as offering access to clean energy while adding to overall power supply.
 
Direct investments
 
In many European countries, companies have the option to deploy renewable energy systems (such as solar installations, wind farms or energy-from-waste plants) to generate power for their own use – referred to as 'direct investment'.
 
Under this model, a company takes responsibility for the entire life cycle of a renewable energy generation asset, assuming all associated risks and financing responsibilities.
 
In some markets, third party developers install self-generation on a company's site to supply power under a lease (or similar contract, which is typically some form of PPA), which limits the corporate end user’s risk.
 
Direct investment has proved particularly popular with companies producing biodegradable waste, such as breweries, food processers and agricultural businesses, as this type of waste can be used as biomass for on-site renewable generation.
 
For other large energy users such as telecoms companies, lack of space and highly sensitive baseload requirements make onsite generation a less viable option.
 
CPPAs
 
A CPPA is a contractual energy supply arrangement directly between a corporate end user and a renewable energy producer.
 
Generally, CPPAs conform to one of two structures, 'physical' (also known as 'direct' or 'sleeved'), or 'virtual' (also known as 'financial' or 'synthetic').
 
Physical/direct CPPAs are between a renewable energy generator and an end user and require the generator to sell electricity produced by a particular asset to the end user.
 
Electricity can only be delivered through wires, and operation of and access to those wires is invariably regulated, unless the generator and end user are physically connected by a private wire (making the arrangement closer to a direct investment model).
 
In European countries that permit CPPAs (such as the UK, Ireland, Germany and Spain), companies need to appoint a suitably regulated entity (usually a licenced energy supplier) to 'sleeve' the electricity from the delivery point at the generating asset to the end user's premises.
 
Virtual CPPAs are financial hedges where the end user pays the generator an agreed strike price over the life of the agreement.
 
The generator must still sell its physical power to a buyer, and will receive a 'market price' for that power from the buyer and a payment from the end user.
 
The payment could be a difference payment (as under a contract for difference based on an agreed strike price), or a 'top-up' payment more akin to a Feed-it Tariff (FIT) payment.
 
The end user also enters separate arrangements for the supply of equivalent volumes of power to be delivered to its premises.
 
Depending on how arrangements are structured, the end user's supplier may physically take the electricity generated by the generator.
 
Network operators, energy suppliers and balancing parties often remain involved in these virtual contractual structures to delineate respective roles and responsibilities.
 
Direct investments vs CPPAs
 
Recently, some large technology companies in the US have made headlines by choosing to invest directly in renewable power projects, opting to commission projects themselves and take full ownership of the assets rather than entering contracts with external suppliers.
 
While this approach is currently less common in Europe with the exception of some relatively small energy generating installations at or next to (generally, industrial) corporate facilities, where the US leads, Europe often follows.
 
When deciding which approach to take, the following factors should be considered.
 
Capex
 
Developing renewable power projects requires significant capex investment, so the decision will largely depend on whether a corporate end user has both the capital and risk appetite to invest in commissioning a captive asset.
 
Opportunity costs also need to be considered, as devoting large amounts of capital to building a renewable energy asset may result in the loss of alternative investment opportunities.
 
CPPAs do not result in ownership of an asset but do allow corporate end users to participate in renewable energy developments as part of the regular outgoing costs of their business, rather than providing large sums upfront.
 
From a developer's perspective, CPPAs provide the revenue certainty they need to either invest in the project themselves or secure financing.
 
Technical expertise
 
Few companies outside the energy industry have the capacity or skills in house to manage a renewable energy project investment from start to finish.
 
Some may find it easier to vertically integrate themselves than others, depending on the nature of their corporate activities.
 
Intermittent renewable generation may not suit the load profile of the company (for example, a data centre would not want to rely on solar or wind power as its primary source of electricity), or there may be insufficient space to physically fit a renewable project onto a corporate end user's premises.
 
Returns
 
Companies need to think about their objectives when making power procurement decisions.
 
Building a self-generation asset may provide the best return on capital, but will not necessarily deliver the most competitive power price or reduce cost of operations in the long term, especially if the asset is located off-site and subject to transmission charges to deliver electricity to the end user.
 
Corporate end users also need to think about whether want to report energy generation assets on their balance sheet, or keep them off balance sheets through the CPPA route.
 
Geography
 
CPPAs are not currently possible in all parts of Europe. Nordic countries currently have the most CPPAs in Europe and the UK is one of the better developed markets, as its regulatory framework allows for more flexibility than some EU Member States.
 
In 2018 Germany, Spain and Poland all settled their first CPPAs, and Benelux, French and Italian companies have expressed an interest in the sector, meaning Europe's CPPA map is likely to change over the next few years.
 
Companies in countries where CPPAs are not an option may wish to consider direct investments.
 
In or out?
 
Most companies will find there is a big jump between buying electricity under contract from an external provider and investing in self-generation from a captive asset.
 
While CPPAs have proved popular in both Europe and North America, direct investment has recently gained traction in the US, where space is less of an issue, and in developing markets such as parts of Africa, where energy infrastructure and power systems are not fully equipped to deal with CPPAs.
 
From a sustainability perspective, both direct investment and CPPAs can have equally beneficial impacts.
 
Companies in the early stages of their power procurement processes should explore both approaches, as ownership of an asset may be the best fit for some business models while others will find it more efficient to receive power under contract from a third party.
 
A version of this article first appeared in Smart Energy International.
 
This article was authored by Daniel Marhewka, corporate and energy partner at Fieldfisher in Munich; Lis Blunsdon energy regulatory partner at Fieldfisher in London; and David Haverbeke energy regulatory partner at Fieldfisher in Brussels.

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