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'Why is Europe adrift on corporate green PPAs – and how can we fix it?'

Hardly a week goes by without another green corporate power-purchase agreement (PPA) making it into the renewables headlines.

In the US, 52% of wind capacity originates in corporate PPAs, up from 23% in 2014 and 5% in 2013, according to the American Wind Energy Association. Yet Europe is lagging behind, with green PPAs having only being signed by industrial or digital consumers since 2015.

So why is Europe so far adrift? Are the recent European PPAs only a fad, or are there fundamental reasons for green energy off-takes on the continent? And what could be done to accelerate it?

In the US, instead of buying power directly from utilities, a number of corporations (digital companies such as Google and Apple, but also larger industrial corporates likes Dow Chemical and Volkswagen) are buying green energy under long-term PPAs directly from independent generators.

Under a typical green PPA structure, corporations enter into a procurement contract for a term of ten or more years, committing to buy energy at a fixed price per kWh, from the operators' wind or solar farms.

The delivery of renewable energy is, in most cases, synthetic — green kWh fed into the grid at one end counts as “delivered green energy” at the other end — rather than wind turbines or solar panels being physically linked to company facilities.

In comparison, European corporates have been reluctant to jump into renewables off-take agreements, with green PPAs only accounting for a tiny share of the installed wind capacity on the continent.

So what are the fundamental differences between the US and EU wind markets to account for such different dynamics? One explanation is pricing. US utilities have not paid PPA prices that create adequate returns for investors — corporate off-takers offer higher prices to developers, thus making those projects more bankable.

Also, instead of a fixed, multi-year feed-in tariffs (FITs) — which has been the support mechanism of choice in Europe — the US government incentivises renewables projects with tax credits over a period of 10 years.

The generator still needs to sell electricity to the wholesale market, at volatile prices, which is not really a preferred set up for risk-averse investors and financial institutions. However, corporate PPAs can mitigate the volatility risk for the developer and provide longer-term price certainty.

Traditionally, this “pain” of price volatility has not been high in European markets ruled by FITs fixed for 10-15 years, meaning that corporate PPAs have not been as attractive.

However, some larger European jurisdictions, including Germany, France and Spain, have been moving away from FITs to auction systems, and getting increasingly close to merchant level pricing.

Auction regulation is relatively new and it remains to be seen how price and term certainty will be affected. From the buyers’ perspective, a corporate PPA structure entails some significant pricing risk if the wholesale power prices are lower than the PPA strike price for a sustained period of time.

Electricity power-price forecasting and hedging to reduce price volatility require complex analysis and sophisticated tools. Without “best practices” being available off-the-shelf, it requires innovational spirit and significant data analytics resources to ramp up PPA modelling, structuring and negotiating capabilities.

Potentially, digital giants such as Google and Apple felt better placed to pioneer this innovative route than smaller European companies.

Another explanation is term. US utilities rarely offer PPA terms longer than five years — short-term contracting has been the norm. But corporate PPAs lock in price for 15 years or more — a particularly attractive option during these times of historically low renewables prices.

European utilities, however, have tended to offer longer-term contracts and have a history of entering into long-term financial hedges. To some extent this has changed due to the nuclear and coal phase-outs, with most European utilities now in a weaker position than they were a few years ago, which has lessened their appetite to enter into longer-term PPAs.

And finally, corporate sustainability requirements and metrics are increasingly in focus for US companies — in Europe this is on the way, albeit more slowly.

So in many respects, US corporations had a head start in going green via PPAs. And it is probably too early to assess with certainty if green PPAs will become big in Europe. But the move away from FITs and the financial difficulties of the utilities are likely to make corporate PPAs an increasingly attractive proposition.

This trend could be accelerated through the build-up and sharing of best practice for complex PPA transactions. For that purpose, corporates could form consortia or associations similar to the Business Renewables Center in the US, which is sponsored by the Rocky Mountain Institute.

For the medium-sized off-takers, particularly in fragmented generation markets, aggregation models pooling energy on the supply and demand side could help.In any case, the trends are pointing in the right direction — larger law firms and consultancies have jumped on the boat in Europe to build up and spread best practice.

Probably it’s just a matter of time until green PPAs in Europe will rise to the heights we’ve seen in the US.

Join the discussion on corporate PPAs at the WindEurope Summit 2016 at 9.00-10.30am on 28 September in Hall F at the Congress Center Hamburg.

Cliff Harris is the vice-chairman of WindEurope and the general manager for the EMEA region at GE Renewable Energy

This piece was published as part of the Thought Leaders series. Recharge’s Thought Leaders Club brings together leading thinkers and participants from the renewable-energy sector to examine the key challenges facing our industry

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