Power to the PPA
Corporate power purchase agreements (PPAs) have been around and in common parlance, if not utilisation, for a good few years. One of the reasons they are popular is that they allow the buyers a means to secure longer term energy price certainty. Electricity buyers can fix their price. Actually a PPA is often a fixed price hedge against variable wholesale energy costs (although wholesale prices can obviously go down).
Fixing prices provides long-term cost visibility but may end up more expensive in the long term compared to market prices, while variable ‘floating’ PPAs tied to market energy prices and/or hedging are more unpredictable but offer a greater chance for lower prices if the dynamics are favourable. The specifics of an agreement will vary depending on the market you are aiming to operate in. Pricing dynamics of a PPA also vary.
Modelling generation income
Deals can be price-fixed for the duration of the contract, fixed with set or variable escalations, fixed but include settlements between different parties depending on wholesale price, indexed to energy markets with various discounts, and floors & ceilings, or a combination of each.
A corporate PPA is a beautiful thing; it can bring electricity consumers and generators together regardless of location, generating capacity and supply requirement. Once concluded it helps to spread the risks associated with fluctuations in electricity prices.
Developers and equity investors may be willing to take the risk on wholesale power prices but, typically, senior debt providers are cautious and look for guaranteed minimum power prices on which to base their lending decision. The counterparts in a corporate PPA do offer fixed prices which may be attractive to generators and their funders who at least then can take a long term ‘annuity’ amount into account in modelling generation income and specifying terms of funding.
Environmental, Social, and Governance
With data data everywhere there are few buildings more energy intensive than data centres and single facilities can now eat up more energy than whole towns. Enter the PPA. To offset this vast energy consumption and ensure their green credentials, many companies are signing PPAs, bringing electricity generated by renewable energy projects to the data centre. A big tick in the sustainability box.
Hyperscalers in the data centre world such as Meta, Amazon, Microsoft, and Google are some of the largest corporate buyers of renewable energy in the world, each having procured multiple gigawatts of renewable energy and they continue to invest in hundreds of renewable energy projects globally. PPAs are an easy-win for ESG creds allowing companies, including data center operators, to ensure their energy needs are covered by an equivalent amount of renewable-generated energy being generated.
Onsite and Physical PPAs
PPA specifics vary depending on the project, location, and the regulations of the local energy market, but at its simplest, a company will form an agreement with an energy provider to invest in a renewable energy project such as a wind or solar farm and then procure the output (energy created) of that facility to cover some or all of the company’s energy requirement once the project is live.
There are different types of PPA. By way of example, onsite PPAs will install renewable energy infrastructure at the buying company’s location and can then feed power directly to the company. These are usually smaller scale than offsite PPAs, in which companies procure the energy from large renewable plants at other locations. Off-site PPAs are larger – up to hundreds of MW per deal – and can be physical PPAs or virtual PPAs.
Physical PPAs are where companies agree to off-take the output of specific projects i.e. a particular wind farm, with virtual PPAs companies buy renewable energy from an energy generator’s portfolio, not attributed directly to specific projects. PPAs are usually for wind or solar projects, but hydroelectric, biogas, geothermal, and even nuclear power can be covered under PPAs. Deals are long-term agreements; 10 years is not uncommon.
Offsite and Sleeved PPAs
Offsite PPAs, even if attributed to a particular renewable project, does not directly power a data centre, rather the project’s output is pumped into the grid and mixed with all other energy plants, dirty and clean; PPAs merely ensure an equivalent amount of a customer’s agreed energy demand is being generated by renewable sources.
Typically, companies still have to procure energy through their utility provider alongside a PPA. In a ‘sleeved’ PPA, the utility provider handles the PPA energy and supplies additional power as required.
So where is the power – where does it sit? Obviously with Amazon!
Customers are looking to remove carbon from their supply chains and operators are setting themselves sustainability targets or having to meet targets imposed on them. As a result digital infrastructure has become the largest global customer for PPAs, these hyperscalers procure gigawatts worth of renewable energy as do telcos seeking to offset both their data centre footprint and their mobile network operations and Amazon remains the largest corporate clean energy buyer in the world, having announced 8.8 GW of PPAs across 16 countries, including 5.6 GW of solar PPAs.
Renewable Energy
Depth and breadth in renewable energy and its technologies has been our backbone – driving a passion for purpose – for many years. CLICK HERE to find out more about our Renewable Energy legal strategies.