We are witnessing increased activity from Large Energy Users (LEUs) aimed at addressing rising energy costs, resilience challenges, ambitious sustainability, environmental and renewable energy targets. A number of commercial and operational levers allow LEUs to use less energy, pay less and buy less.
Corporate Purchase Power Agreements (CPPAs) for example offer a route for LEUs to purchase renewable energy, manage exposure to changes in future power prices and trace renewable electricity consumption by purchasing power directly from renewable energy projects.
CPPA deals have grown substantially in recent years, mainly in North America. The initial boom was driven by large tech corporations and pioneers, such as those in the RE100 initiative, who are now close to meeting their renewable energy targets. European CPPA deal volume has also grown substantially in recent years, driven by strong demand from large technology and manufacturing giants in Scandinavia and Ireland. The UK CPPA market has to date been relatively underdeveloped, with recent experience based largely on contracts between “early mover” LEUs and operational projects. However, a growing number of corporates have now set specific targets to procure a large portion of their energy from renewable sources.
The next wave of CPPA deals will be based on LEUs seeking to meet their specific commitments, and will therefore most likely be quite different from what we have seen in the past. We expect high price sensitivity and limited willingness to pay a green premium. The price of these CPPAs will need to demonstrate a clear benefit to LEUs versus expectations of future wholesale power prices, and contracts will need to be for far shorter durations than the technical lifetime of the projects. We expect deals for under ten years, and many will be in the seven to 15-year range. New renewable energy projects will need to demonstrate highly competitive economics in order to be marketable to corporates, and their investment cases will be more complex.
Historically, the primary route to market for renewable generators was through subsidies under long-term government-backed or government-sponsored contracts that provided stable revenue streams. However, subsidies for technologies that are now reaching scale and maturity such as onshore wind and solar are declining worldwide and business cases for new routes to market are being developed. For renewable generators, direct CPPAs can offer stable revenues long-term, and enable subsidy-free projects. Developers’ business development activity in the CPPA market should focus on large corporates who still need to procure renewable energy to meet their green targets, as well as on specific energy-intensive projects with green energy mandates that are in development. This second wave of CPPAs is set to unlock subsidy-free projects in Europe.