November 17 (Renewables Now) - Corporate renewable energy PPAs are definitely an emerging opportunity for large energy consumers in Europe but massive adoption depends on a few key developments, Mariano Vizcaíno from Our New Energy, a pan-European energy services house, tells Renewables Now in a special commentary.
The “good old days” when renewable technologies received onerous public support for their development seem to be over now. Wind and PV power is already cheaper than conventional generation in many areas - despite the low prices of fossil fuels - and public support schemes are shrinking or, at least, turning towards extremely competitive tenders. Logically, market-driven mechanisms are the way to go when it comes to securing financing for new capacity.
Corporate Power Purchase Agreements (“Corporate PPAs”) have proven to be one of the most effective mechanisms to date. However, although their penetration in Europe has been steadily increasing lately, it is still far from the level of proliferation in the US and still concentrated in very few countries.
First of all, a clear and more cohesive regulatory framework is needed for Corporate PPAs to take off. A fair amount of European countries have blurry legal frameworks in regard to PPAs, leading to ever-lasting –or, even worse, uncertain- processes that jeopardize their adoption. This is, for example, the case of Germany, with a legal framework that raises serious doubts about the legality of PPAs.
The EU’s Renewable Energy Directive (RED) –part of the so called Clean Energy Package- is seen as a key opportunity to remove these barriers, but the transposition of this Directive to national regulatory frameworks will still take some time.
Additionally, price formation mechanisms should also be more efficient letting all technologies compete in equal circumstances, something that doesn’t happen as of today. Indeed, with low wholesale prices in many countries that do not reflect the externalities of the different generating technologies, new price formation mechanisms are needed for renewable corporate PPAs to reflect their real value. The ETS (Emission Trading Scheme) and RED set the direction, but additional reforms are necessary.
Raising awareness of corporate PPAs among the different counterparts is another factor.
Corporate PPAs allow buyers to not only reduce their carbon footprint, but also hedge their exposure to volatile costs. However, entering into such a long-term agreement can be seen as a double-edged sword since trying to estimate the behaviour of the market during 10 ,15 or 20 years is not a trivial task, especially in a changing scenario like the current one in Europe. Buyers and generators need to feel comfortable with this tool before they decide to adopt it massively.
On the opportunity side, the reduction of capital and operating costs of renewable technologies combined with the current liquidity of the capital markets, have favoured the entry of investors willing to sponsor projects with 100% equity. This new scenario puts pressure on financing institutions, who will have to compete harder to get their stake of a EUR 380 billion per year market, mainly by bringing down financing costs while, at the same time, relaxing their exigencies in regard to project bankability. Thus, it’s not unthinkable now –as it was some years ago- that projects start to get funding based on repayment periods larger than the secured revenue flow, and it is foreseeable a near future in which 8 years PPAs support 15 years lending tenors, reducing the risk of entering into a very long agreement therefore favouring the adoption of corporate PPAs as a standard mechanism.
Another key opportunity derives from the decarbonisation obligations that large corporations impose on their suppliers and contractors. While Corporate PPAs have been traditionally related to big companies as a tool to achieve institutional aspirations of becoming greener as sustainability demands reach different levels of their supply chain, they have started to attract a wider range of companies. Such is the case of Foxconn, the iPhone manufacturer, and its commitment to construct 400 megawatts of solar in China’s Henan province by 2018. A similar process could be expected in Europe as large European companies start embracing corporate PPAs to cover their energy needs.
To sum up, the so-called Energy Transition brings a plethora of opportunities to companies willing to innovate, and corporate PPAs are one of the most tangible at the moment. Events like RE-Source 2017 and the RE-Source Platform are crucial to raise awareness on them and pave the way for its massive adoption in Europe. We are confident that their indisputable advantages will make us see European companies implementing them within their energy supply portfolio.