Why CPPA contract lengths are shrinking (and what that really means)

For consumers, the original driver behind the growth of CPPAs was the access they gave organisations to energy from a named renewable source. This helped businesses boost their environmental claims and bolster their sustainability credentials.

Nowadays, CPPAs’ primary benefit is enabling consumers to fix their electricity price over a period of multiple years. This makes them unique in today’s energy market.

So why would average contract lengths be decreasing? What’s driving that shift – and does it indicate market maturity… or market caution?

Cutting the corporate red tape

One of the major sticking points with CPPAs’ popularity was governance and board-approval barriers. Organisations were finding that – although they recognised the potential benefits of securing long-term, fixed-price energy contracts – those contracts were difficult to agree.

The complications of factors such as contract complexity, financial negotiation and risk allocation were amplified during the need for board-level sign-off.

Typically, five-year contracts don’t require the same level of scrutiny when requesting board approval. In fact, a lot of these five-year contracts don’t require board approval at all, so they’re usually quicker to execute.

Reducing corporate risk

Although the ability to fix energy prices over multiple years is a key CPPA benefit for consumers, it’s also possible to view it as a risk. Some organisations can feel uncomfortable fixing prices for too long in case the market price drops, leaving them paying over the odds for the remainder of the contact.

Of course, the opposite can also prove true, whereby the market price soars and consumers that have agreed CPPAs make significant savings.

Although impossible to know for sure, it’s easier to predict how market prices might change over a five-year period than it is to forecast them for ten or more years. This inherently makes a shorter-term CPPA a more comfortable choice than a longer-term CPPA for many of consumers.

Reducing generator risk

The inverse is true for generators.

For them, the purpose of agreeing CPPAs has always been to secure revenue. When CPPAs first came onto the scene some 15 years ago, there wasn’t much renewable-source generation available. Developers therefore needed to build the assets to generate it.

Of course, building a large-scale wind or solar farm doesn’t come cheap.

So developers needed to borrow money – or ‘project finance’ – in order to build them. Just as you need a salary for mortgage eligibility, renewable developers need to secure project revenue for project finance eligibility. Banks typically require lendees to pay back this project finance over a period of 10-15 years. They therefore also require reassurance that the project will earn sufficient revenue over the same time period. This is known as ‘bankability’.

In the modern world of CPPAs, many renewable assets already exist and the grid’s considerably ‘greener’. All these projects that developers built years ago are now operational and have fully (or nearly) repaid the relevant project finance. They therefore don’t require the same level of bankability.

Without those stringent lending requirements, CPPAs which relate to operational projects can be both cheaper and of shorter tenor.

On top of this, the prospect of agreeing a CPPA with a large corporate that has fantastic credit isn’t as realistic anymore. As market accessibility has increased, so has the number – and range – of consumers looking to agree contracts. So signing a shorter contract might also suit a generator if they’re less certain on the credit stability of the consumer.

Either way, it’s possible that generators might not need the financial security of a 10-15 year CPPA contract, and that the flexibility of a shorter-term one might suit them better.

We can see there are a number of factors contributing to the shift towards shorter CPPA tenors. While some of these do relate to risk-avoidance, they predominantly reflect a maturing market. And, as accessibility continues to improve, it seems unlikely the contract-length trend will reverse anytime soon.

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