Tom Melhuish 11 min read

How do Corporate PPAs work?

Corporate Power Purchase Agreements (CPPAs) are a game-changing strategy that large businesses use to purchase electricity. This approach transforms how they power their operations and contributes to a more sustainable planet.

As the UK strides towards its ambitious net-zero targets, understanding the power of Corporate PPAs is becoming critical for business energy procurement managers at large companies.

In this guide, we will provide a clear explanation of how large UK businesses can use CPPAs to purchase renewable electricity.

Contents

How Corporate PPAs work
Examples of UK Corporate PPAs
The key benefits of Corporate PPAs
The key risks of Corporate PPAs
Pricing options for Corporate PPAs

How does a corporate power purchase agreement work?

A Corporate Power Purchase Agreement is an agreement between a large business that consumes electricity and a renewable energy generator. To demonstrate how a CPPA works, we’ll use the common example of a large UK wind farm.

In a CPPA, your business agrees on a contract with the owner of the wind farm to purchase electricity generated by the farm for 10 to 15 years.

The CPPA doesn’t involve a physical connection between your commercial properties and the wind farm. Instead, the wind farm feeds all the electricity it generates onto the national grid.

Your business continues to use electricity from the same grid, with a business energy supplier acting as an intermediary by offtaking the electricity generated from the wind farm and supplying electricity to your company.

If you’re purchasing electricity with a PPA, you’ll pay the wind farm owner for the wholesale purchase of electricity at the rate agreed in the PPA.

You pay the business energy supplier for the distribution and transmission costs associated with using the national grid to deliver the electricity to your commercial properties.

The CPPA enables your business to advertise the fact that you are using renewable energy from a specific source and allows you to claim all of the carbon credits associated with the renewable project.

Examples of Corporate PPAs in the UK

Corporate PPA agreements tend to be publicly announced as they are useful tools for promoting the green credentials of businesses purchasing electricity.

We’ve highlighted some examples of companies using CPPAs to purchase renewable electricity generated in the UK:

Nestle has agreed to buy all the power produced by Sanquhar Wind Farm on a remote hill in Dumfries and Galloway for the next 15 years. CPPA intermediary: EDF.
Google has committed to 90% carbon-free UK operations by 2025 and signed a PPA agreement for 100MW of renewable energy from the Scotland Moray West offshore wind farm. CPPA intermediary: Engie.
Allied Glass has agreed to buy 66GWh each year from the Galloway run-of-the-river hydroelectric dam. CPPA intermediary: Drax.

The Benefits of a Corporate PPA

Here, we’ll explore the key reasons corporate PPAs are becoming more popular for large UK businesses.

Price security

In a CPPA, you agree to purchase renewable electricity at an agreed rate for a long period, typically over 10 years.

A CPPA offers financial protection for your business by providing a stable, predictable price for electricity over a long period, often lower than the current business electricity prices available on the grid.

In the past few years, volatility has been a significant issue in UK wholesale energy prices.

Industrial firms that consume vast quantities of electricity can be severely affected by unanticipated upturns in energy prices. A CPPA can be used as a key component of an energy price risk hedging strategy.

A commitment to green energy procurement

A corporate PPA directly links your business with a renewable energy generator, like an off-shore wind farm.

Consumers are becoming more aware that greenwashing is an issue. A CPPA overcomes this by providing traceability and authenticity of your renewable business energy supply.

The commitment of your business to a CPPA helps to encourage other developers of wind and solar farms and supports the UK’s transition to a net-zero economy.

What are the risks associated with Corporate PPAs?

Corporate PPAs are large contractual commitments that introduce financial risks for both the buyer and the seller. Understanding these risks is key to deciding whether a CPPA is right for your business.

Here are the three key risks associated with a corporate PPA.

Price risk – The buyer may end up paying more than they would have if they had purchased electricity from the open market if the price of electricity falls below the agreed-upon price in the PPA.
Performance risk – The generator may not be able to produce the agreed-upon volume of electricity, forcing the buyer to purchase electricity from another source at a higher price.
Contractual risk – There is a risk that the terms of the PPA may not be properly understood or enforced, leading to disputes between the two parties. Ensuring that all parties in the agreement are creditworthy is vital.

Pricing options for corporate PPAs

Here are the common Power Purchase Agreements for electricity buyers, explained in more detail below:

Fixed-price PPA

In a fixed-price PPA, the buyer agrees to purchase electricity from the commercial renewable energy generator at a fixed price over a specific period of time. This provides the generator with a guaranteed revenue stream and can help the buyer to manage their energy costs.

Variable price PPA

A Variable Price Power Purchase Agreement is a type of agreement that allows the price of electricity to fluctuate over time based on market conditions.

Under this arrangement, the buyer agrees to purchase electricity from the generator at a price that varies based on an agreed-upon index that tracks the wholesale price of energy.

Other CPPAs pricing structures

Indexed PPA. An indexed PPA is similar to a fixed price PPA, but the price of electricity is linked to an index, such as the Consumer Price Index (CPI).
Collar PPA. A collar PPA sets both a floor and a ceiling price for the electricity sold under the agreement.
Sleeved PPA. Sleeved PPAs involve a third party, such as an energy supplier, who acts as an intermediary between the generator and the buyer. The third-party buys the electricity from the generator and then sells it to the buyer at a fixed or indexed price.
Virtual PPA. A virtual PPA is a financial agreement where the buyer purchases the Renewable Energy Certificates (RECs) associated with a specific renewable energy project without taking physical delivery of the electricity generated by the project.

What energy sources are available for a Corporate PPA?

Solar and wind energy are the two most common energy sources when entering a PPA, but here are all the possible renewable generator projects used in Britain:

Solar Power. Solar energy is harnessed through photovoltaic panels that convert sunlight into electricity.
Wind Power. Wind turbines generate electricity by converting the wind’s kinetic energy into electrical energy.
Hydro Power. Hydroelectric power is generated using water flowing through turbines, converting the potential energy of water into electrical energy.
Biomass. Biomass energy is produced from organic matter, such as wood chips, agricultural waste, and municipal solid waste, which is burned to generate electricity.
Geothermal Power. Geothermal energy is generated using heat from the earth’s core to produce steam and driving a turbine to generate electricity.

Corporate Power Purchase Agreement – FAQs

Here are some frequently asked questions surrounding Power Purchase Agreements.

What are the steps taken when negotiating a PPA?

When negotiating PPAs, several common steps are taken when negotiating a Power Purchase Agreement:

Expression of interest – A renewable energy project developer will typically request expressions of interest from potential purchasers of electricity. This may be done through a competitive tender process or directly approaching potential purchasers.
Term sheet negotiation – Once a purchaser has expressed interest, the parties will typically enter into negotiations to agree on the basic terms of the PPA. This may involve discussing issues such as the duration of the contract, the price to be paid for the electricity, the terms for delivery and payment, and any other relevant commercial terms.
Due diligence – After the parties have agreed on the basic terms, the purchaser will typically conduct due diligence on the renewable energy project to assess its technical, financial, and legal feasibility.
PPA negotiation – Based on the outcome of the due diligence, the parties will then finalise the terms of the PPA. This will involve negotiating the specific provisions of the agreement, including the terms for delivery and payment, the duration of the contract, the price to be paid for the electricity, and any other relevant commercial terms.
Signing and execution – Once the parties have agreed on the final terms of the PPA, the agreement will be signed and executed.

How long do power purchase agreements typically last?

The duration of a Power Purchase Agreement can vary depending on the type of energy source, the size of the project, and the specific terms negotiated between the parties.

The typical duration of a PPA for renewable energy projects in the UK is between 10 and 15 years.

For instance, the UK government’s Contracts for Difference scheme, which supports renewable energy projects, offers fixed-price contracts for up to 15 years for wind and solar projects and up to 10 years for other renewable technologies such as biomass, geothermal, and tidal power.

How do renewable energy companies use Power Purchase Agreements?

Renewable energy companies in the UK use Power Purchase Agreements to sell their electricity to buyers, such as commercial or industrial entities, business energy suppliers, or utilities.

PPAs allow renewable energy companies to secure long-term contracts to sell their electricity, providing them with a stable source of revenue and helping them finance new projects.

Why do companies purchase Virtual Power Purchase Agreements?

A Virtual Power Purchase Agreement is a financial agreement between a renewable energy generator and a buyer. The buyer agrees to purchase renewable energy certificates (RECs) for a specific project.

As well as securing energy, businesses will use a Virtual Power Purchase Agreement to benefit from the following:

Meeting sustainability goals – Companies that have set targets to reduce their greenhouse gas emissions or to increase their use of renewable energy may use virtual PPAs to demonstrate their commitment to sustainability. By purchasing RECs from a specific renewable energy project, they can claim the project’s environmental benefits without building or operating their own renewable energy infrastructure.
Saving money – In some cases, virtual PPAs can provide cost savings for companies, compared to purchasing green electricity from the grid. This is because the price of RECs may be lower than that of traditional grid electricity, especially if the renewable energy project is located in an area with strong renewable resources.
Corporate social responsibility – Companies can use virtual PPAs for their broader corporate social responsibility efforts. They demonstrate their commitment to sustainability and responsible business practices.