PPA the new way of buying power - Levent Gurdenli

The countdown to COP26 has prompted renewed focus on Scotland’s role as a leader in building a low-carbon future.

Levent Gürdenli is a partner at national law firm Weightmans

Here, businesses have a key part to play. As they review what steps they can take, it will be important they don’t overlook the value of corporate Power Purchase Agreements (PPAs).

PPAs are a new way of buying power. Instead of purchasing electricity from a licensed electricity supplier, businesses contract directly with the renewable generator themselves.

This allows firms to lower overall carbon emissions by adopting long-term supply agreements from renewable or low-carbon energy sources, such as wind, solar or biogas.

And for providers, the long-term revenue stream that a PPA provides can be the difference between a renewable energy project being funded or not.

But the benefits go beyond sustainability.

PPAs’ structure means businesses can fix prices over the course of their agreement, reducing their exposure to fluctuations in energy costs.

Meanwhile, where consumers’ purchasing decisions are increasingly influenced by brands’ environmental credentials, boosting low-carbon energy as a proportion of a firm’s energy mix can deliver a commercial and reputational advantage.

PPAs are not, however, without their challenges. Firms interested in Corporate PPAs must understand these risks, and how to manage them.

Key risks are associated with overall volumes of power generated, and the ‘profile’ of generation by renewable assets.

Variations in weather can result in lower volumes of energy being generated than anticipated. Even if the total volume is correct, the peaks and troughs of production may not match with a business’ demand. In these cases, businesses will have to procure top-up or ‘balancing power’ to meet their needs – an extra cost.

One solution is agreeing fixed volumes or ‘shaped’ profiles with generators, rather than purchasing on a ‘pay-as-produced’ basis. Where volumes or profiles fall outside those parameters, the generator is liable for the cost of balancing power.

And, while PPAs generally offer greater price certainty, movements in the wholesale market could see an initially favourable price becoming less so over time. Agreeing ‘floating’ price structures, with fixed floors or ceilings or periodic price reviews, can mitigate this risk.

Another option for business is contracting only for a proportion of their total demand under a corporate PPA, using alternative power sources to meet remaining demand.

Pulling any one of these contractual levels will impact other parts of PPA agreements. For example, fixing volumes will likely result in a higher price than a ‘pay-as-produced’ contract. But with careful planning and the right advice, a balance can be reached.

Already the likes of Tesco and Amazon are using PPAs to their advantage, and others can follow suit.

Managing risks is critical. With the right contractual foundation in place, businesses can secure deals that are sustainable in practice and nature.

Levent Gürdenli is a partner at national law firm Weightmans