Corporate PPAs: industry collaboration driving European growth

Traditionally, the off-site renewable CPPA market in Europe has been dominated by onshore wind, in part because activity to date has been strongest in the Nordic countries where wind power is the strongest natural resource. However, the figures show potential for increased CPPAs for solar photovoltaic (PV) and offshore wind energy, as more European countries seek to remove regulatory barriers and different technologies become more cost competitive.

We are also beginning to see targeted interventions by European governments which are likely to have a positive influence on CPPA deployment. These interventions are being driven in particular by the Paris Agreement, which includes a requirement to cut emissions to at least 40% below 1990 levels by 2030, and the recast EU directive on the promotion of the use of energy from renewable sources (RED II).

A changing market

According to RE-Source (34-page / 2.4MB PDF), 85% of corporate renewable PPAs to date have been signed for wind energy. However, the picture is changing. Spain, for example, is becoming increasingly competitive in pricing for solar PPAs, according to BNEF. As a result, solar PV accounted for 30% of contracted capacity in 2019, compared with under one tenth in 2018.

This underlines the importance of a permissive market and regulatory environment. In this respect, encouragement can be drawn from governments in eastern Europe and the Balkans looking to remove regulatory barriers to CPPAs following the passage of the RED II directive. There is further encouragement from the fact that some of the countries in Europe with the largest aggregate deployment of renewables capacity overall have relatively low CPPA installed capacity: Italy has 64MW, Germany has 374MW and France 338MW; compared to 812MW in the UK and over 2,000MW in each of Norway and Sweden, according to RE-Source. This suggests that there is plenty of room for growth in the CPPA market, particularly since these countries have shown considerable appetite for renewables deployment in a wider sense.

The offshore wind sector offers another potential route to increased European CPPA activity. Orsted has entered into a large number of MW of CPPAs with European companies and this is an area where continued growth is a strong possibility. Offshore wind has the potential to facilitate high volume CPPAs which would be invaluable to extending the reach of the market, particularly among those corporate offtakers with very energy-intensive operations and high demand.

Market platforms and industry collaboration

One potentially influential factor in the growth of CPPAs in Europe has been the role of market platforms and industry collaboration.

'Soft' platforms, or industry collaboration groups, are organisations, or groups of organisations, which seek to educate, enable and facilitate companies to enter into CPPAs with generators rather than to procure electricity through conventional means from a licensed supplier. They include RE-Source and RE100, which has over 268 members globally. Other platforms could be described as 'hard' platforms, which provide formal trading platforms or exchanges for generators and buyers. They include Zeigo and Level 10.

Some of these groups, including RE-Source, are also beginning to look at the possibility of standard form CPPAs. Membership organisations including the European Federation of Energy Traders have also produced standard form CPPAs. These have the potential to accelerate the development of market norms and reduce timescales and costs of negotiation, and both companies and generators will be watching these developments closely.

As well as their wider 'educational' function, some of these market platforms require certain commitments from their members. For example, RE100 requires members and potential members to either obtain 100% of their electricity from renewable sources or to have a clear strategy and timetable in place to achieve this. There are also requirements around annual reporting and compliance which mean that signing up to these initiatives is not an easy route to 'green washing' operations.

Market platforms also play a role in advertising potential demand and attracting generators towards the possibility of entering into CPPAs. RE100, for example, publishes its members' cumulative electricity demand which, in turn, allows estimates to be made of potential shortfalls - potentially serving as a signal to generators that the demand is there to provide a route to market for renewable electricity through a CPPA. This could be particularly significant in markets where government-supported incentive schemes have closed to new generation relative recently - including the UK.

'Hard' platforms play a different advertising role by introducing transparency to opportunities for selling and purchasing through CPPAs. By doing so, they have responded to what was a genuine gap in the market: connecting companies ready to commit to a CPPA with generators with suitable projects at the right stage in development.

The real benefit of hard platforms will become evident when the number of providers increases and they achieve greater awareness among potential customers of all sizes and demand profiles, as well as developers. This could overcome information deficits, reduce barriers for entry and potentially facilitate other services, such as demand aggregation in multi-purchaser CPPAs. The proportion of new CPPAs which have been entered into via platforms in the US is considerable, and there is no reason to suppose that they will not have a similar impact in Europe and other markets.

Soft pressure from companies on their supply chain

'Soft' pressure, originating from consumers and then cascaded by large companies through their supply chain, can have a significant impact on corporate behaviour. As time goes on, and these trends become more pronounced, it will become increasingly likely that suppliers will be required to demonstrate increasing commitment to sustainability.

While this may not necessarily mean increased uptake of CPPAs, it does create an opportunity for generators and for larger companies to encourage and promote the benefit of entering into CPPAs to their supply chain. This, in turn, will increase opportunities for supply chain companies to retain and increase orders and contracts with larger companies.

We are beginning to see the impact of this in several of our markets, with large companies using soft pressure to help educate their supply chain on the financial and sustainability benefits of CPPAs, and offering their suppliers the opportunity to partake in such an arrangement alongside the large company as an 'anchor' tenant.

We are also seeing large businesses exert 'harder' commercial pressure – for example, by requiring potential suppliers to demonstrate that their products were produced using renewable electricity as a condition to any purchasing decision.

Policy decisions driving CPPAs

We are beginning to see targeted interventions by European governments which are likely to have a positive influence on CPPA deployment, driven in part by Paris Agreement targets.

The most significant of these is the RED II Directive, a binding piece of EU legislation which sets a target of at least 32% of electricity to be from renewable energy sources by 2030, with a possible increase to the target in 2023. The directive also includes a requirement to remove administrative barriers to CPPAs, with EU member states required to assess the regulatory and administrative barriers to, and facilitate the uptake of, such agreements. Member states are also required to ensure that CPPAs are not subject to disproportionate or discriminatory procedures or charges.

Some countries have gone further. Italy, as part of its New RES Decree, has launched a consultation on setting up a discrete CPPA platform under the auspices of the Italian market operator Gestore dei Mercati Energetici (GME). The proposals entrust GME with the creation of a market platform for long-term trading of energy from renewable sources.

In 2019, Ireland published its Climate Action Plan containing an ambitious target to meet 15% of electricity demand by renewable sources contracted under CPPAs by 2030. The intention is that this level of unsubsidised development will complement deployment of new renewables capacity brought forward via auctions for support under the Renewable Electricity Support System (RESS).

Join Pinsent Masons for a virtual event, Powering the future: the opportunities which corporate power purchase agreements present to accelerate the path to net zero on Wednesday 28 April.