An increasingly popular way to access renewable energy, lower costs and increase predictability
As electricity prices rise and we move towards a carbon‑constrained future, companies are looking for ways to manage their exposure to changing electricity prices and to purchase electricity from renewable sources. Generators are also looking beyond retailers as potential offtakers to support the development of new renewables facilities. Consequently, power purchase agreements with corporate offtakers (Corporate PPAs) for electricity from renewable facilities have become increasingly popular in Australia.
As electricity prices rise and we move towards a carbon‑constrained future, companies are looking for ways to manage their exposure to changing electricity prices and to purchase electricity from renewable sources. Generators are also looking beyond retailers as potential offtakers to support the development of new renewables facilities. Consequently, power purchase agreements with corporate offtakers (Corporate PPAs) for electricity from renewable facilities have become increasingly popular in Australia.
Companies looking to enter into Corporate PPAs can come from any industry or a group of industries where the load is large enough to support a generator’s project, either in part or as a whole. Banks, local councils, water corporations, energy-intensive industry and universities have all ventured (or are looking to venture) into the world of Corporate PPAs.
The electricity industry is highly regulated, with set roles for generators, retailers and customers, which means there can be significant regulatory barriers for electricity users to contract directly with a generator. Generators and corporates have been innovative in tailoring the structure of their Corporate PPAs to suit the individual needs of a deal and to overcome these regulatory barriers.
Key risks and opportunities
Key drivers for entering into Corporate PPAs are:
- Securing stable energy pricing: a well-negotiated Corporate PPA can secure lower and predictable energy pricing to shield the energy buyer from the volatile energy prices it faces under its electricity retail contracts.
- Green credentials: large‑scale generation certificates (LGCs) available from a renewable energy generator can be an important tool for demonstrating that the entity is achieving specific targets relating to renewable energy generation (eg emissions reduction targets or promotion of renewable energy in a particular jurisdiction).
- Managing retail contract exposure: a company can also use the LGCs to manage its exposure under its retail contracts to retailers.
Key risks to be managed include:
- Connection delay: as a result of an increase in the development of renewable facilities and network congestion in certain parts of the grid, some new generators are experiencing significant delays in achieving connection. If the renewable facility is not yet operational, it is important to undertake proper due diligence to understand the likelihood of your generator counterparty experiencing these types of connection delays, and to make sure risk of connection delay sits with the right party under the contract.
- Change in law: the energy regulatory landscape is one that is subject of constant policy discussions and reform, so change in law risk is a matter that is often heavily negotiated in corporate PPA arrangements.
- Dealing with multiple offtakes: generators will often contract with multiple offtakers in respect of the same renewable facility. You may need to consider whether this raises any issues regarding priority with other offtakers.
- AFSL: the transactions contemplated under a corporate PPA often fall within the broad definition of a 'derivative' under the Corporations Act. You may need to consider whether an Australian Financial Services Licence is required for entry into a corporate PPA, or whether an appropriate exemption applies.
Key questions
Once your organisation decides to enter into a Corporate PPA, the key questions to ask are: will your organisation require…:
- The ability to terminate the Corporate PPA early? Generators, particularly those that require a power purchase agreement to underpin any project financing for their project, require longer-term agreements (traditionally around 10-15 years). While corporates may wish to include an early termination for convenience clause, generators may require an early termination amount or ask for the price under the Corporate PPA to reflect the additional risk that the generator takes on in return.
- A fixed commencement of the Corporate PPA (such as to align with any new retail contract)? If so, what liquidated damages will you require, if any, in the event of delay?
- A set load from the renewable energy generation? What will the minimum supply requirements be? A right to be able to use the renewable project’s name and information in your marketing material?
- An Australian financial services licence (AFSL) or obtain the services of a third party who holds an AFSL to act as an intermediary?
And finally:
- Can your organisation provide credit support (eg a parent company guarantee or a suitable bank guarantee)? Would your organisation prefer to negotiate credit‑support triggers such as a change to a company’s net debt‑to‑net worth ratio or a decrease in the net asset level by a certain amount?