CPPAs: the benefits, the challenges and the future

CPPA benefits

CPPAs offer consumers financial, environmental, reputational and risk-reduction benefits. These include:

• Managing power price risk over an extended period
• Reducing your reportable Scope 2 emissions thanks to relevant Renewable Guarantee of Origin (REGO) certification

…and agreeing multiple CPPAs across different technology types or price/risk profiles further offers the benefits of:

• Spreading intermittency risk
• Creating a ‘flatter’ overall baseload that better matches consumption patterns
• Promoting more focused environmental, social and governance (ESG) stories relating to specific technologies or generators

Arranging CPPAs for a defined proportion of your energy use means benefitting from a degree of stability and hedging a percentage of your energy investment against volatile wholesale prices.

Being able to state exactly where the power you’ve purchased comes from offers your organisation reputational benefits.

CPPA challenges

Pricing negotiations have to factor in the difficulties of forecasting longer-term wholesale energy prices, so settling on a fair contract price can become challenging.

Sources of electricity like solar and wind are intermittent. Generators, therefore, aren’t always able to supply contracted energy exactly when the consumer needs it. The responsibility for ‘balancing’ (making sure there’s energy to plug the natural gaps intermittent sources leave) – and associated cost – changes depending on the type of CPPA arrangement.

‘Sleeving’ – the ring-fencing of power at contractual prices and terms is a complex concept to agree and to manage – but it’s essential for incorporating CPPA volume into a consumer’s retail supply contract.

CPPA types

Private wire arrangements involve the generator supplying energy directly to the consumer. They suit small-scale offtake and tend to result in longer contracts durations.

However, geographical limitations mean that organisations either have to provide the on-site space for renewable assets or find a neighbouring generator.

Physical CPPAs involve the physical transfer of electricity and require a supplier to ‘sleeve’ generated power through the Grid on the consumer’s behalf.

Virtual CPPAs are purely financial agreements, as the consumer doesn’t take ownership of the generated renewable energy it pays for. The lack of requirement to take physical delivery of the power also makes them structurally simpler to negotiate as there’s less of an operational burden.

However, virtual contracts work through a Contract for Difference (CfD) mechanism and therefore classify as a ‘derivative instrument’ in the UK. As a corporate, you’d need to report this in your income statement, and due to the CfD-style payment structure, it can result in volatility in your bottom line. It’s therefore important your organisation understands the risks and reporting requirements to ensure this transaction style suits you.

CPPAs: now

At the moment, CPPA prices in the UK are benchmarked against CfD prices. The CfD scheme’s a subsidy-type arrangement designed to support renewable development in the UK. Each year, the government awards contracts to successful developers through ‘allocation rounds’. In the latest allocation round (AR6), strike prices were £69.75 – £82.01/MWh (CPI linked) across solar and offshore wind. From a developer’s perspective, this is quite an attractive price point. It leaves them with two choices: (1) transact through the government CfD scheme; or (2) transact through a CPPA.

As a private sector transaction with no subsidy support, the CPPA route can be complex. As a result, developers tend to have a natural preference to transact through the CfD scheme.

In order to attract developers to CPPAs, it makes sense for CPPA prices to be higher than the CfD price. This is what we’re seeing in the market today. From a corporate’s perspective, that can mean a relatively high price entry point. As a result, there tends to be a lack of pricing consensus between generators and corporates. This has acted as a headwind in the CPPA market during recent times.

CPPAs: the future

Some believe that the Government’s 2030 Grid decarbonisation targets are so ambitious that the CfD scheme alone won’t be able to fully support them. In this case, the private sector would have an increasingly important role to play – which would naturally lead to a growing CPPA market. This would mean that we could expect to see a decoupling of CPPA prices from CfD prices after the 2025 allocation round.

Other areas in which CPPAs are adapting to CfD influence:

• Evolution towards shared-risk model to protect generators against negative prices (CfDs don’t compensate for any negative prices)
• Inflation-linked pricing (mirrors CfD structure)
• Developers diversifying revenue streams across CPPAs and CfDs

As the CPPA market continues to adapt and evolve, it also welcomes a new generation of buyers who might be transacting through a CPPA for the first time. These new market entrants will benefit from growing standardisation in a slowly maturing market. CPPAs are easier to agree than they were a few years ago.

It’s therefore an exciting time for corporate buyers to seek such transaction types as they aim to hedge their exposure to wholesale price risk while supporting their ESG commitments.

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