CPPAs: the opportunities and challenges for consumers and generators
16th May 2023
What makes Corporate Power Purchase Agreements (CPPAs) attractive for organisations that generate energy and those that consume it in the UK? And what challenges do they face?
What’s a Corporate Power Purchase Agreement (CPPA)?
CPPAs are agreements under which an end customer makes a long-term commitment to a renewable generator for the supply of renewable power. Typical tenors are between 10 and 15 years, although shorter tenors may also be possible.
How can CPPAs reduce your organisation’s emissions and help cut energy costs?
If you’re a consumer, you can contract to buy some or all the electricity you need from a renewable generator through a CPPA. Doing so allows an organisation to meaningfully reduce its emissions associated with electricity consumption. Such PPAs afford an end customer a fixed or capped price for its electricity over an agreed term allowing it to mitigate the threat of rising wholesale prices and budget more effectively for it.
Is the energy landscape supportive to CPPAs?
The UK Government’s Energy Bill of July 2022 maintained the commitment to decarbonise the electricity grid. CPPAs can play a significant role in achieving that with the commitment of a credit worthy end customer enabling the emergence of new renewable generation schemes, so-called additionality. CPPAs also stand to be an important accompaniment to The Energy Security Strategy, published in April 2022. This expressed the UK Government’s desire for “an acceleration in energy independence”.
What are the opportunities and threats of CPPAs?
Whether you’re a consumer or a generator, CPPAs pose a number of opportunities but may equally challenge:
CPPA upsides for consumers
- The opportunity to buy renewable energy directly from a defined generation project over a fixed period at an agreed price.
- Reduce volatility exposure to the electricity market.
- Promote new UK-based renewables to deliver energy security.
- Reduce carbon emissions and address Environmental, Social and Governance (ESG) ambitions.
- Understand exactly where your power is coming from.
- Smaller organisations can join to increase bargaining power and set up group CPPAs.
CPPA considerations for consumers
- It’s likely you may be paying more for your energy in the short term, at the price of having a constant price in the longer term.
- The long-term commitment inherent to CPPAs should be accompanied by corresponding Environmental, Social and Governance (ESG) goals; do they align?
- CPPAs represent long-term, legally binding commitments that may be complex to execute. A level of expertise is typically required, if not within the business, then through a trusted partner.
Upside of CPPAs for generators
- Receive a fixed price for surplus renewable energy over a long period. Boost your bottom line in a predictable way.
- Sell up to 100% of renewable energy generated through a single contract or retain some of your capacity to sell on a merchant basis at potentially higher rates.
- Help secure funding for development of subsidy-free renewable generation through demonstrating a long-term offtake agreement at a given price from an end customer.
CPPA considerations for generators
- The price agreed with the end customer will need to be sufficient and the term long enough to access finance to develop the project and provide a satisfactory level of return.
- You may run the risk of selling some of your electricity over the course of the contract at below the agreed price with the end customer if retaining some merchant market exposure against a portion of output.
- Need assurance that the end customer has a good enough credit rating at the outset and throughout the contract.
How Drax can help you benefit from CPPAs
As a licensed electricity supplier, Drax can readily facilitate your CPPA journey – including registration and settlement, and balancing when consumption and supply aren’t in step. It’s also possible for us to ‘sleeve’ power into your existing contractual arrangements if required.
And with our own hydro generating capacity, we can even offer you shorter-term CPPAs ourselves.
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