Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Increasing role of PPAs in renewable projects

Power Purchase Agreements (PPAs) are emerging as a new route to market for renewable energy generation projects.

PPAs are agreements signed by a power producer to provide energy to another party, such as a business, over a set period of time. They present opportunities for renewable developers to get projects off the ground without government support and for receiving companies to secure a low-carbon power supply at an agreed cost.

The rise of PPAs

According to research organisation Bloomberg New Energy Finance (BNEF), the number of corporations around the world buying clean energy through PPAs is rapidly increasing. BNEF’s latest analysis, published on 29 January, showed that companies purchased 13.4GW of clean energy through PPAs in 2018. This represents a new record at more than double 2017’s total of 6.16GW. It found that contracts were signed by 121 corporations in 21 different countries in 2018.

The report also found that over 60% of the global activity in PPAs during 2018 occurred in the US, where companies signed deals to purchase 8.5GW of clean energy, nearly triple the amount signed in 2017. In Europe, the Middle East and Africa, corporations also purchased record volumes of clean energy, with a combined capacity of 2.3GW, which doubles the 1.1GW signed in 2017.

Jonas Rooze, Head of Corporate Sustainability for BNEF, said: “Corporations have signed contracts to purchase over 32GW of clean power since 2008, an amount comparable to the generation capacity of the Netherlands, with 86% of this activity coming since 2015 and more than 40% in 2018 alone.”

Research by trade body WindEurope, also published on 29 January, highlighted a similar surge in such agreements specifically for European windfarms. It said that companies around Europe have now signed almost 5GW of PPAs with windfarms and that 2018 saw 1.5GW of new PPA deals, with the aluminium sector the most active in signing new agreements.

WindEurope CEO Giles Dickson said: “2018 saw a record number of new deals,” adding: “In Germany Mercedes are now going to use wind to power their electric vehicle and battery factories.”

The reason for growth

New trends identified by BNEF and WindEurope in 2018 included a wave of smaller corporate energy buyers entering the PPA market and the first PPAs in the automotive sector and in pharmaceuticals. They also found the PPA market to be expanding geographically with 2018 seeing the first corporate clean energy PPAs in markets including Germany, Spain and Poland.
The rise could be linked to the falling cost of renewable energy as more widespread deployment and technological innovations have driven down costs, while the cost of fossil fuel generation has increased. A report by the International Renewable Energy Agency in January 2018 found that the cost of generating power from onshore wind had fallen by around 23% since 2010, while the cost of solar electricity had dropped by 73% over the same period.

Another factor could be the increased desire from corporations to cut their emissions. In September 2018 Science Based Targets reported a year-on-year increase of 39% in the number of new corporates setting science-based emissions reduction targets in 2018 compared to 2017. In 2018 Facebook led corporate energy buyers in purchasing renewable energy supply, with 2.6GW of capacity secured across its global operations. On the company’s target to source 100% renewable energy by 2020 Facebook, Founder Mark Zuckerberg said: “Stopping climate change is something we can only do as a global community, and we have to act together before it’s too late.”

In the UK, volatile wholesale energy costs and high power prices have been cited as reasons for increased PPA uptake. Data from University College London in February 2018 found that UK industry was paying on average 33% more for electricity than the rest of Europe. Interest may also have been fuelled by the closure in 2017 of the Renewables Obligation (RO) – a support scheme for larger-scale renewables – and by recent doubts over state support for small-scale renewables after the government announced in July 2018 that it would end the export tariff under the Feed-in Tariff scheme. There was a suggestion that the tariff was no longer required as a route to market because the PPA market was sufficiently competitive. However, the government announced in January that the scheme would be replaced by a new Smart Export Guarantee whereby all large energy suppliers will have to remunerate small-scale generators for the electricity they export to the grid.

Emerging projects

The past year has seen a number of significant PPA announcements in the UK. In December developer Lightsource BP announced that it had signed the UK’s “biggest ever” subsidy-free solar deal with brewing firm Budweiser for 100MW of solar panels. Earlier in the month Lightsource BP said it had agreed contracts for a total of 330MW of solar with different partners across the UK. Nick Boyle, Chief Executive at Lightsource BP, said that this deployment would see the developer return to the level of activity last seen during the RO subsidy scheme.

Other deals included NextEnergy Solar Fund signing a PPA with solar asset manager Zestec Asset Management to install commercial solar across the UK. Announced on 11 February 2019, the agreement will mean that commercial landlords will pay a reduced tariff compared to their grid rate for electricity produced by the solar PV system. Elsewhere, Centrica and Engie both signed 15-year PPAs this February to purchase electricity from the 950MW Moray East offshore windfarm from 2022, when the project begins operation. Oscar Diaz, Project Director for Moray East, said the PPAs “bring high-capacity, low cost, low-carbon power generation to the UK wholesale market on a long-term contract”.

Future potential

In a report published on 21 January, consultancy Wood Mackenzie predicted that the UK would join the “subsidy-free solar club” in 2019. It said that there was 2.3GW worth of solar projects that either already had planning approval or were awaiting permission that could be delivered without the need for financial support from the government. Additionally, with a number of new agreements being announced or under development, it predicted that PPAs will play an increasingly important role in deploying renewables as the year progresses.

Even large-scale projects could benefit, with speculation that the Swansea tidal lagoon scheme could be revived with PPAs. Tidal Lagoon Power – the firm behind the proposed tidal energy project, which was rejected by the government in June 2018 – claimed in February that the project could be built within six years without government subsidies. It said that several major companies were interested in buying the electricity that would be generated through PPAs, including commercial property developer Land Securities, Cardiff Airport and developer Berkeley Group.

Conclusion

The rapidly growing PPA market presents opportunities for businesses to cut energy costs and developers to gain a route to market, as well as helping support the broader transition to a low carbon economy.