What’s the outlook for Corporate Power Purchase Agreements in the UK?
3rd May 2023
How are UK Corporate Power Purchase Agreements changing and what does it mean for generators and consumers of renewable electricity?
A growing demand for CPPAs
We’re witnessing growing demand from organisations for CPPAs, and increased levels of interest from generators too. It’s possible this is in part due to low administrative strike prices announced under the next round (AR5) of Contracts for Difference (CfDs).
The government’s CfDs have generally been a favoured route to market for renewable technologies as the prices offered have been supportive over the longer term. That still applies but the perceived advantage of a CfD over a CPPA has certainly narrowed lately, and lower strike prices might be expected to lead to greater potential interest for CPPAs among generators.
CPPAs have historically appealed to larger consumers of electricity who are better placed to deal with the complexity. They’ll typically choose to allocate only defined amounts of their consumption to such contracts as part of a wider hedging strategy.
CPPAs certainly don’t represent a silver bullet but should more be considered a component of a wider suite to how an organisation can fulfil its decarbonisation journey.
No two CPPAs are the same
The CPPA market may have been around for some time, but that doesn’t mean we’ve reached a point where contracts are standardised. Every CPPA contract is bespoke in nature. As a result, it may take a significant time to progress the opportunity. It also suggests that unless your organisation has great experience in the field, you might want to consider working with a partner.
CPPAs tend to be complex because of the effort required to knit together in a legal construct the competing interests of parties concerned. The end customer naturally seeks a low price and the generator a high price.
For generators, entering a CPPA will typically dictate trading some early market value for longer term price certainty that allows their project to progress to commissioning. The security afforded by the offtake of a reputable end customer is a prerequisite to raising finance to move through the construction phase.
The current CPPA market favours sellers over buyers for now
However, CPPAs seem to be something of a seller’s market right now. The balance of power seems to lie with generators for now, reflecting a general lack of proceedable renewable projects compared to business demand.
The business response to the high price energy environment has been to accelerate adoption of CPPAs, yet access to such projects is restricted. Grid access particularly is slowing down the emergence of new renewable projects and creating an increased level of competition around those projects coming forward. In addition, for some developers it’s feasible for them to look beyond the security arising from a CPPA (or CfD) and embrace a fully merchant model instead. Lenders in turn tend to exercise more caution to projects configured in this way.
A hybrid model is featuring more frequently in the current market whereby the generator may retain the right to sell as much as 50 per cent of its output to the market and only commit the balance to an end customer. This is advantageous to the generator in the near years yet at the same time effectively constrains the PPA capacity available in the market for contracting directly to end customers.
CPPA tenors are less rigid
The desire for greater flexibility may also be part of another trend we’re noticing. Early CPPAs in the UK might typically be struck over extended durations of 15-20 years. These seem less prevalent in today’s market with around 10 years now representing the most common tenor (i.e. the length of contract) for both wind and solar PV developments. This is perhaps another indication of the finance community becoming more at ease with this type of framework.
CPPAs are here to stay
The market for renewable CPPAs remains buoyant. And it appears this will remain, given the supportive environment afforded by climate targets. Subsidies for renewables are less widespread today and generators must look to other avenues to bring forward their developments; CPPAs can fulfil this role.
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