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Corporate PPAs: Key questions and guidance for the industry

16/04/2020

Locations

Belgium, France, Germany, Ireland, Italy, Netherlands, Spain, United Kingdom

Following Fieldfisher's recent webinar series to accompany the launch of our market survey report "Think GIG: The rise of corporate PPAs", we have collated the questions put to our panellists along with their answers, outlining many of the major themes in this sector.

  To download a copy of our thought leadership report and industry survey on corporate PPAs, please click here.
 
1. What damages are available for COD delays financial CPPAs?

Whether or not delays in achieving the stated commercial operation date (COD) for power generation projects give rise to claims for losses tends to be one of the most heavily negotiated aspects of CPPA contracts.

This issue can arise in respect of hedged volumes, where the offtaker has hedged a proportion of the power volume they expect to receive from the generator. If the generator is late supplying the energy, the offtaker may expect to be compensated for losses on those hedges.

The outcome of these negotiations depends very much on the relative bargaining power and financial bandwidth of the parties involved in the CPPA.

Where the generating asset is relatively small, the supplier is unlikely to have the resources to cover the offtaker's losses.

With larger projects, it is possible to come to an arrangement to cover some of the losses caused by a COD delay, however very few projects can sustain a full typical hedging loss.

In this context, the focus tends to be on mitigation of losses and ensuring the COD notification process is as finely tuned possible. A risk-sharing balance needs to be struck in the CPPA contract, usually through adapted liability and damages thresholds.

 
2. What are the trends in the type of entity signing CPPAs with corporates?

The supply side of the CPPA market continues to be dominated by renewable energy developers and investors.

Recently, there has been a tendency by parties financing the developer/portfolio of developers to take charge of contract negotiations.

Investors are tending to get involved earlier in the process, to fully understand the risks and maximise returns.
To date, European utilities have tended not to get involved in CPPA projects, however utilities from outside Europe have recently started to come into the market.

 
3. Has there been any product innovation in CPPAs?

To date, the main innovation has been the rise of aggregating parties.

Aggregators, which take on bundles of renewable power generation and manage related risks, are starting to assume increasingly prominent roles in the CPPA market.

What tends to curtail aggregators' involvement is the fact that corporates typically want to limit the number of intermediaries in their energy supply chain, preferring (to the extent that this is possible in electricity markets) to enter straight contractual relationships with generators.

 
4. What damages are available for corporates taking construction risk in financial CPPAs?

CPPA contracts need to have the flexibility to deal with, and provide remedies for, a range of construction risks, such as delays, cost overruns and insolvency of suppliers.

Corporates who take on these risks want them to be balanced by certain rights in the event that these risks are realised.

Corporates seeking additionality (i.e., financial support from the EU earmarked for beneficial projects that would not have gone ahead without the corporate's involvement) have to come to some sort of risk-sharing arrangement to be able to say that additionality principles have been met.

As these are not simply financial transactions, but projects which claim to offer wider benefits, most corporates appreciate that a middle ground has to be reached.

 
5. What role can brokers play in this sector?

Brokers can play a very active role in Europe's CPPA sector.

There is a clear need for parties able to intermediate between corporates and generators. 

Matching parties' objectives across the divide can be tricky, especially as there is no standard form agreement yet and risk allocation is not settled.

 
6. Why has there been so little progress towards the adoption of pro forma CPPA contracts in Europe?

It remains very difficult to standardise the risk profile that a corporate is prepared to take in a CPPA, as every business has a different set of risk requirements.

Generators and corporates relish the freedom to draw up bespoke agreements, in contrast to rigid contracts under the traditional utility supply model.

Regulatory barriers have also been a brake on the development of standard contracts.

RED II (the EU's recast Renewable Energy Directive) should force national regulatory authorities to align their approach to CPPAs across the EU, which should help with the development of standard documents.

There are however huge differences between the location and size of power generation projects, as well as considerable variations in the kinds of technologies used, so it is difficult to produce standard documents that cater to these factors.

 
7. How can smaller corporates enter the CPPA market?

The CPPA market, while still developing, is certainly more geared towards large corporates at present.

In addition to prohibitive transaction costs, the main problem for smaller companies is normally that they are not sufficiently creditworthy for banks to finance the power generation project.

Depending on the nature and size of the project and the length of the CPPA, it is not impossible for smaller corporates to enter these transactions, but it makes the task of the developer harder if they require bank financing.

Smaller companies have the option to use a private wire arrangement, which reduces the number of regulatory hurdles and associated costs involved in signing a CPPA.

Standardised documentation will also help bring costs down.

Smaller companies can also participate in aggregated purchasing arrangements, as long as they are mindful of relevant competition law restrictions (this approach is starting to develop in some countries in Europe, but has so far proved quite tricky to implement).
 

8. How much appetite is there for short duration CPPAs, especially for assets approaching the end of their useful lives?

This issue is starting to emerge across Europe, as different national renewable support schemes expire and fresh waves of existing generation capacity become available in the market every year.

Corporates considering CPPAs with legacy generators do not have to worry about bank financing requirements to construct new projects, and the shorter tenor of the deals reduces market exposure.

There is however a technical aspect to these deals, in that parties are required to obtain a technical report confirming that assets are still fit for production and for how long.

With the future of assets in mind, repowerings and refurbishments are underway at a number legacy projects across Europe.
 

9. Is there demand for cross-border PPAs?

There is some interest in cross-border deals, however the complexity and cost of overcoming regulatory hurdles for financially settled CPPAs that encompass multiple generators and/or offtakers is increased when crossing international boundaries.

This aspect of the CPPA market is still developing and barriers to cross-border CPPAs should be reduced by the implementation of RED II.

One outlier is Scandinavia, which is unique with regard to its large number of hydro installations and is well set up for cross border PPAs. Scandinavian countries are relatively unusual in having large amounts of generation and comparatively little demand, giving corporates the opportunity to trade electricity received under CPPAs in international markets.

Assuming regulatory hurdles are lowered or removed, demand for cross-border PPAs is likely to be driven by the fluidity of the Guarantees of Origin (GoOs) market.

At present, this is hindered by sharp discrepancies between the prices of GoOs in different jurisdictions.

 
10. What criteria need to be met for a long-term CPPA to be considered as a lease?

It is sensible to seek specialist advice on the accounting treatment of a CPPA.

Lawyers can help translate this analysis into the CPPA contract.

In broad terms, the accounting treatment of CPPAs is determined according to who is the effective economic operator of the energy generation asset.

Corporates wishing to avoid being deemed to be in economic control of the asset need to ensure this is reflected in what the contract states regarding ownership and operation of the assets, including provisions for grid access and notifying maintenance.

If a corporate is judged to be the operator of the generating asset, this brings with it additional duties which many corporates will want to avoid.

 
11. If governments or state-backed companies decide to use CPPAs, what features of these deals need to moderated by regulators?

If the offtaker is public, the developer needs to look at the general and specific regulatory requirements for public procurement in that jurisdiction to ensure they can comply with these rules.

Once the parties are over the public procurement hurdle, the risks and risk appetite involved in dealing with public offtakers are broadly the same as they are with a private offtaker.

One advantage for developers of dealing with a public offtaker is that it is usually easier to satisfy banks regarding credit support, as public bodies typically have much stronger credit standings than normal corporate offtakers.
 
12. What opportunities are there for energy storage technologies in Europe's CPPA market?

Battery storage is very useful when it comes to dealing with intermittency of renewable energy generation.

The two main barriers for battery storage are: first, that the cost of batteries is still very high; and second, regulatory regimes generally have not caught up with the role batteries can play in power markets or how they should be treated in law.

In both cases, it is likely to be just a matter of time until these barriers are reduced and ultimately removed.

Some projects are starting to combine energy generation with battery storage and it will be interesting to see how these models fare in the market.

In addition to batteries, there has been recent interest in the role hydrogen could potentially play in energy storage.

With the development of large offshore windfarms, price volatility is likely to increase and with it negative pricing.

Anything that can divert energy from the grid and store it in a way that keeps its value and helps provide pricing certainty to the market is going to be very important for renewables in general and for CPPAs.

 
Concluding remarks

Prior to the coronavirus (COVID-19) crisis and related collapse in power prices in March 2020, Spain and Portugal were particularly active markets for CPPAs and the sector looked set for strong growth.

The effects of the pandemic, which have forced a collapse in energy demand and prices, have applied the brakes to many deals in this sector, and it remains to be seen how quickly the market recovers.

To an extent, tariff and regulatory issues will determine which markets will enable CPPAs to proliferate and thrive.

It will also depend on how risk sharing arrangements evolve, and on the renewable potential of different countries and how well their local networks function to facilitate CPPAs.

For more information on the effects of coronavirus on CPPAs, read our article Coronavirus: An ill wind for corporate PPAs? Recently published by PV International.
 
These questions were posed by CPPA market participants during a series of webinars around the launch of Fieldfisher's thought leadership report "Think GIG: The rise of corporate PPAs". They were answered collectively by our energy specialists, Daniel Marhewka, Lis Blunsdon and David Haverbeke.
 

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