With energy prices spiralling and many businesses embarking on their Net Zero journey, PPAs are now routinely at the centre of any discussions relating to energy procurement strategy.
What is a Corporate PPA (CPPA)?
A CPPA is an agreement under which a corporate entity purchases electricity (normally renewable electricity) directly from a generator for its own use.
The CPPA itself sets out the terms for the transfer of energy between the buyer and the seller for an agreed amount of energy at a negotiated £/MWh. PPAs are generally secured at a fixed rate, typically for a 10-25 year tenor.
This is a significant variation from a traditional supply contract, which requires a far shorter-term commitment and where the retail supplier can source energy from wherever they choose within their fuel mix.
Why choose a CPPA?
Generally speaking, there are two reasons that a business might be interested in securing a CPPA.
Firstly, enhanced sustainability credentials.
A CPPA allows the buyer to secure their energy directly from a generator, meaning that the provenance of the energy sourced can be guaranteed at asset level. Moreover, because the energy and the green energy certificates are generally secured together (i.e. no “disaggregation”), it means that there is no possibility of “greenwashing”, as can be found on some standard green electricity tariffs.
Perhaps most notably, the off taker can claim credible ‘additionality’ on their renewable energy procurement as, by providing a guaranteed revenue stream to the generator, they are effectively financing a brand-new renewable asset.
The second main reason to choose a CPPA is for long-term price certainty.
The extended timeframe means that corporates can use PPAs as a long-term price hedge to deliver price certainty, whilst insulating themselves from potentially unfavourable market movements.
Liquidity in GB electricity futures markets is often limited to five or six seasons forward; a CPPA allows the buyer to fix prices beyond this horizon whilst also realising significant near-term cashflow benefits.
Types of CPPAs
There are two main types of off-site CPPA: ‘Physical’ and ‘Virtual’.
A Physical CPPA (sometimes referred to as a ‘Sleeved’ or ‘Direct’ CPPA) involves the actual delivery of energy from the generator directly into the consumer’s flexible supply contract (via a process called ‘sleeving’).
In a Virtual structure (also known as a ‘Synthetic’, ‘Indirect’ or ‘Financial’ CPPA), there is no physical exchange of energy, with the agreed CPPA price being honoured via a reconciliation settled outside of the supply contract. This style of CPPA is perhaps better viewed as a type of financial instrument or derivative.
Physical CPPA
Virtual CPPA
What else should I consider before entering into a CPPA?
Procuring energy via a CPPA can mean a significant investment of a company’s time and resource, so it is essential that a business is fully committed to the principal before fully embarking on the process.
CPPAs can be highly complex contractual instruments and come in a wide range of structures and delivery types.
It is therefore essential that a business fully understands the benefits and risks associated with each prospective route, in order to optimise the ‘best fit’ CPPA solution for the company. This will likely mean consideration of term, volume, pricing / contract structure, market risk, delivery method, technology, location, and more…
The CPPA world can be daunting and the range of possibilities near endless. A good consultant will support you on your CPPA journey, helping you to fully realise the benefits and navigate through the potential pitfalls.
For advice on CPPAs, or to discuss Consultus’ range of CPPA products and services please contact your Consultant or a member of our Sales Team who will be more than happy to help, on 0330 221 1000.