Source renewable electricity with PPA

The power sector accounts for around 32% of annual global carbon dioxide emissions, producing approximately 15.8 giga tonnes of CO2 emissions in 2019. Global demand for power is set to triple in many net zero scenarios. The main sources of electricity generation globally are coal (37%), natural gas (24%), hydro (16%) and nuclear (10%), with solar and wind comprising approximately 5%.

Image: World electricity generation mix by fuel, 1971-2019

Source: IEA, Paris https://www.iea.org/data-and-statistics/charts/world-electricity-generation-mix-by-fuel-1971-2019, IEA.

A PPA is a contract between the buyer (off-taker) and the power producer (developer, Independent Power Producer, or investor) to purchase electricity at a pre-agreed price for a determined period of time. The contract contains the commercial terms of the electricity sale: contract length, point of delivery, delivery date and times, volume, price and product. The electricity sold under a PPA can be from existing renewable energy supply or a new build project.

A corporate PPA refers to a PPA where the off-taker is a business buying electricity (rather than a utility, government, or local authority).

Image: PPAs diagram

Source: RE-source Southeast Hub Corporate PPAs provide energy users with access to renewable power, within an otherwise fossil fuel-powered electricity grid.

Corporate buyers use renewable PPAs to increase cost visibility, reduce electricity costs and meet sustainability goals by reducing their carbon emissions. Developers finance, build and operate the renewable power system. Their benefits are risk mitigation, cost savings and customer attraction and retention.

Usage

Analysis from Bloomberg New Energy Finance shows corporate PPAs have grown exponentially from hundreds of MWs in the early 2010s to 30,000 MW in 2021. To date, the expansion in corporate PPAs has been driven by large multinationals, particularly in the information technology and telecommunications sectors. Given wind and solar PV technologies are becoming more cost effective, power markets are increasingly liberalized, while corporate knowledge awareness is increasing. PPA uptake is expected to continue growing in the 2020s.

Image: Global corporate PPAs, by technology​

Source: BloombergNEF  

Note: Chart only includes disclosed, offsite PPAs. APAC estimates are not included. Data are through October 2022.​

Climate impact

Targeted emissions sources

PPAs are primarily used for renewable power technologies, including wind and solar. Displacing fossil fuels present in the electricity grid mix, PPAs reduce Scope 2 emissions from current power consumption, as well as Scope 1 emissions (if the renewable power is deployed in conjunction with electrification). PPAs used by upstream and downstream stakeholders can also affect a company’s Scope 3 emissions.

Decarbonization impact

Capital investments in new renewable power sources result in a short-term increase in emissions, given technologies such as wind turbines and solar panels have embodied carbon associated with material sourcing and manufacturing. However, a life cycle emissions assessment conducted by McKinsey reveals that those technologies can be up to 90% more efficient, i.e. they produce 90% less CO2 per kWh generated, depending on the fuel source being replaced in the existing power grid mix.

The exact decarbonization impact will also fluctuate depending on the extent to which components are recycled or upcycled when they reach end of life.

Business impact

Benefits

PPAs have many benefits above and beyond CO2 emission reductions, and the likely operational cost savings than can be achieved. The table below summarizes key benefits for both corporate buyers and developers.

Image: Benefits of corporate renewable PPAs

Source: WBCSD REscale. Corporate Renewable Power Purchase Agreements: Scaling up globally (report).

Costs

PPAs enable corporate buyers access to low-carbon energy sources without investing in the associated technologies, as the capital costs are borne by the developer. The costs of a PPA for the corporate buyer come in the form of a long-term off-take agreement, which often exceed ten years.

From an operational cost perspective, many PPAs can provide immediate cost savings when compared to existing (grey) utility electricity tariffs. Policy incentives or subsidies can be used to form a business case for PPAs, however, solar and wind are becoming increasingly competitive without government support.

The extent to which PPAs offer immediate operational cost savings depend on existing electricity costs, local climatic conditions such as solar irradiation and wind speeds. They are also influenced by potential transmission and distribution costs, should the system not be directly connected to the corporate buyer.

Indicative abatement cost

Providing indicative abatement costs is challenging with the economics of PPAs heavily dependent on local market, policy and climatic environments. However, given many PPAs offer operational cost savings (and require no capital investment), abatement costs are often negative.

Impact beyond climate and business

Co-benefits

Given the price competitiveness of renewables, and the relatively local nature of many renewable installations, corporate PPAs create a more robust power system for all users connected to the grid. It is also less exposed to geopolitical risks and fossil fuel price volatility. Renewable assets such as wind and solar also create local employment opportunities, with the energy transition overall expecting to generate an additional 10 million jobs by 2030.

Potential side-effects

Electricity consumed through off-site PPAs (those not connected via a direct wire from the asset to the corporate buyer’s site) are reconciled on an annual basis. Energy consumed is not matched to the exact generation patterns. While PPAs enable additional renewable capacity within the grid, their variable generation profiles must be accommodated by the power system operators who are responsible for balancing supply and demand and ensuring continuous access to power, regardless of wind and solar conditions.

Typical business profile

In principle, all companies can benefit from PPAs, although for small to medium sized companies, the efforts and knowledge required to negotiate a PPA might make other renewable electricity procurement options the preferred choice. A good corporate credit rating can be beneficial for companies to ensure the contract is viable and will attract third-party investment.

Markets must be (at least partially) liberalized to allow for PPA structures, which is the case in the majority of Europe and the Americas, and various countries in Asia Pacific.

Approach

Corporate buyers will need to invest time and resources to understand the potential benefits and corresponding risk, and investigate financial and regulatory matters such as understanding pricing and accounting, and competition law issues. Ensuring management buy-in early on in the procurement process is critical to developing the most appropriate PPA structures.

Stakeholders involved

• Company functions:

Executive Management, Strategy, Sustainability, Procurement, Finance and Accounting.

• Main providers:

According to the BNEF, the top global electricity developers in 2022 are: Engie SA, AES, NextEra Energy Resources LLC, Invenergy LLC, Orsted A/S, Ignis, Acciona, Apex Clean Energy Inc, EDP Renewables, EDF Energy, First Solar Inc, Enel Green Power, Lightsource Renewable Energy, Vattenfall, Iberdrola, SunChese Power, Silicon Ranch Corp, Origis Energy NV, Duke Energy and Eneco NV.

Key parameters to consider

• Solution maturity

PPAs are widely implemented across sectors and markets, with many established energy companies providing this procurement method.

• Lifetime

Average lifetime used to be 10-20 years, although contract terms are reducing given current market conditions (2022) and developers willing to take on more market risk.

• Additional specificities

Multi-buyer PPAs, in which multiple corporate buyers join forces on a single PPA, may enable economies of scale, risk sharing amongst corporate buyers, a more advantageous bargaining position and a higher credit rating. Multi-buyer PPAs can also be leveraged by inexperienced corporate buyers, or those with low credit ratings.

• Eventual subsidies available

Many markets have subsidies for low-carbon technology solutions that would be sourced with the help of PPAs.