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06 September 2019 5 min read

Corporate PPAs in the global market: What are the biggest challenges?

Ben Heininger

Ben Heininger
Senior Consultant | Energy, utilities and resources | London

Large corporations contracting for corporate Power Purchase Agreements across the globe must clear multiple hurdles.

In their core markets, corporations have a few levers to pull in order to meet their targets for decarbonisation and emissions reduction, including corporate PPAs (CPPAs), energy efficiency measures, or renewable energy certificates. Baringa have worked with several large energy users that have recently signed CPPAs in the UK and Northwest Europe, but many of these companies have had difficulties reducing emissions or purchasing green power across their global operations. Our experience shows that the ability to contract for renewable electricity under CPPAs is affected by a number of factors. These include the extent of deregulation and policy support in energy markets, financing and currency exchange considerations, and the availability of experienced developers in the local market.   

Regulation of energy markets  

Countries with liberalised energy markets provide a more supportive environment for the emergence of CPPAs. Markets where a single entity controls all three components of the energy system – generation, transmission, and distribution – restrict the ability of a private developer to bilaterally contract with a company to sell electricity over the transmission and distribution networks. As countries begin to unbundle their energy systems and allow private players to enter the market, thus creating competition, the scene is set for corporate PPAs. For instance, in Egypt, companies can purchase electricity directly from a generator, but they must have a connection to the transmission network. Currently, a transmission-connected generator cannot sell to a company with multiple demand loads across the country’s distribution networks, which creates significant regulatory hurdles for businesses looking to sign CPPAs.

Until recently, a number of countries, particularly in Europe, have seen little uptake in CPPAs. This has been the result of relatively generous government policies intended to encourage the development of renewables. These policies translate into support mechanisms, such as contracts for difference, which guarantee generators a certain amount for every MWh sold, or feed-in tariffs that provide for a fixed payment per MWh generated, not related to the revenues from selling electricity. In markets with generous policy support, developers have fewer incentives to enter into fixed-terms contracts with corporations, many of which will be less creditworthy than the governments of the countries where they are developing assets.

Financing and foreign currency exchange

Large energy users need significant supplies of renewable assets, which require material capital investment. Though some developers may be able to finance the construction of these assets on their own, for many it is more practical to raise debt. In countries with high interest rates, financing projects using local debt will mean that a developer cannot offer as competitive a price. In such cases, developers might seek to raise debt in a foreign currency, most likely USD, which exposes them to fluctuations in what could be a volatile domestic currency. The developers will need to decide whether they are willing to take this risk; indeed, for some lenders the risk will be unacceptable, or will lead to a substantial increase in financing costs. For many companies, contracting in USD would lead to a currency discrepancy between their local currency revenues and their foreign currency payments under the CPPA. The recent collapse of the Argentinian peso is a prime example of the risks for those who finance in USD – it effectively led to an increase in financing costs of around 25%, more than enough to render a project loss-making.

Local knowledge gaps

While many countries may have local developers with experience in constructing renewable assets as independent power producers with incumbent utilities, structuring and negotiating a CPPA with a private company is an altogether different proposition. Conversely, there may be companies with considerable experience in developing assets under CPPAs that lack knowledge of the local market and regulations. Corporations trying to assess the credibility of local developers in order to minimise the development risk might therefore have difficulties, even when joint ventures have been formed between global and local developers.

These challenges highlight the importance for corporations to set out a renewable energy strategy appropriate for a global context, and to carefully define the process for executing their CPPAs. We will seek to address the steps to a successful CPPA in our next blog.