Jonathan McNair: Hello and welcome to Inspiratia's latest webcast, where we will be considering the topic of corporate power purchase agreements or PPAs in the renewable energy sector, a subject that has increasing prominence within the markets. To help us delve into the finer points of corporate PPAs I am delighted to be joined today by two leading practitioners who will provide us with insight from differing vantage points within the sphere.
First we have Gus Wood who is a partner at law firm Gowling WLG. Gus' practice focusses on the energy sector, interpreting regulatory regimes and commercial contracts within those frameworks. He has drafted and negotiated some of the most significant PPAs in the UK renewables sector.
Joining Gus today is Zosia Riesner who is Head of UK PPA at developer Lightsource, which operates the largest solar portfolio in both the UK and Europe and has deployed some £2.2 billion of capital into projects over the past five years. Recent highlights in its corporate PPA business include projects for Belfast International Airport and Thames Water.
Well hello and welcome to you both. So to kick things off I think we should just start with the real basics. So that means I start with you Gus. What do we mean by corporate PPAs?
Gus Wood: Great well thanks Jonathan.
Well the concept of corporate PPAs covers a fairly broad range of PPA options. I guess it's important to recognise first of all what a PPA is. I'm sure many of the listeners are familiar with PPAs. But a PPA is usually an agreement used to purchase power from a particular power station and in a normal PPA, so a non-corporate PPA, the power is normally purchased by an electricity company. So in the UK that would normally be a licensed electricity supplier. So when people talk about corporate PPAs we tend to be talking about any agreement to purchase power from a particular power station where the purchaser isn't an electricity company, but instead it's a corporate, so a normal business that's buying the power to use in its own business. So that tends to be what we mean by corporate PPAs.
Jonathan: OK and coming to you Zosia. Why would a generator use a corporate PPA?
Zosia Riesner: I think there are a number of attractions for a generator in contracting directly with the end user and those are different as to whether we're talking about a sleeved PPA or private wire PPA, concepts that people may be familiar with. So as a generator/developer the initial interest in PPA is that it provides a long term revenue certainty from the credit worthy counterparty, ideally, and that remains true whether it be for a sleeved PPA, which is connected to the grid, or a private wire PPA that supplies the end user site directly. Additionally, with the private wire PPA, the corporate PPA provides an alternative route to market and the opportunity that isn't there under the, you know, standard utility PPA route.
Jonathan: OK so sticking with Zosia, I mean presumably there's perhaps nothing really major stopping these agreements being done many years ago. But why do you think there is so much talk about them now?
Zosia: So interestingly, I think we're about ten years into the UK PPA, corporate PPA market and you're right, there's a lot of discussion about corporate PPAs now but they're really new news.
I think the reason there's more focus on them now both from developers and end users than there was previously is that it's a concept that's been picked up globally and, as we're seeing, this is something that is being developed outside the UK market, it has caught more people's attention. But also, as we move away from the subsidised renewables market into a subsidy free environment, more has to be done to open up opportunities for the development of projects and the PPA provides an alternative way of developing a bankable project in absence of subsidies if the right agreement on price can be struck between the buyer and the seller.
Jonathan: OK. From the buyer's perspective or the corporate perspective Gus, I mean isn't it true to say that there are a number of factors in play behind their motivations in this area?
Gus: Yes I definitely agree with that. As Zosia said, it's a combination really of a push and a pull. There's…I think there's a push on generators to be a little bit more, using a little bit more ingenuity around how they structure their projects. I mean certainly in the UK, as we all know, there is a tightening of the belt and a restriction and a withdrawing of many of the subsidies you know particularly the ROC regime which has been the main subsidy for large renewables in the UK for some 15 years.
With that having been removed and with there being no immediate prospect of a contract for difference - the CFD option - for the established technologies of solar and onshore wind. In that…given that context, as Zosia says, generators certainly need to try and find alternative sources and alternative routes to market, other ways of finding a bankable income stream.
So there's definitely that push on generators, but clearly there's also then the attraction to corporate and the sort of factors involved in a corporate, you know, in corporate's thinking are, as Zosia said, the same sort of factors that have been at play for some ten years now and they are issues around corporate social responsibilities. So those organisations such as the RE 100 companies that have made commitments to using 100% renewable electricity, clearly they would be focussed on PPAs for renewable projects that they can use to demonstrate their satisfaction of those requirements.
But that's not necessarily anything new and similarly from the corporate's perspective, if it can find a way of obtaining long term price certainty on the power it uses in its business then that can be an advantage, you can use that as a hedge against future price volatility. So that's certainly an attraction of a corporate PPA, but again that's not necessarily a new thing. As Zosia said, perhaps the main factor on the corporate side as to why we're seeing more of these corporate PPAs in the UK at the moment is less of a UK issue and more of a global, the global factor that a lot of global corporates have started to do these sorts of deals across the world and so the UK is part of that movement.
Jonathan: So…I mean which of the factors would you say is most valuable to the corporate? What's the main point driving these?
Gus: Well I think ultimately it does come down to price of course. There's no way of escaping the fact that the corporates are only going to do this if the price is right. But you know that doesn't mean that there aren't other factors involved and that…and the renewable story, the green credentials, that's certainly a big factor in these decisions.
Jonathan: Do you think that could possibly rise to the top of the agenda at some point over the coming years with the kind of divestment from the fossil fuel movement?
Gus: Yeah over time these factors, the importance of these factors, ebbs and flows and different factors take on different levels of significance, but clearly price is always going to remain a very significant factor and in terms of the renewable green drivers this is only one way of demonstrating commitment to those corporate social responsibility commitments. There's other ways in which a corporate could demonstrate renewable electricity rather than purchasing it direct from a generator. But clearly, purchasing it direct from a generator is a very tangible way of demonstrating that commitment, particularly if the contracts combined with branding and marketing and PR campaigns centred around those particular assets.
Jonathan: OK. You both mentioned you know the withdrawal of the renewables obligation in the UK and you know along with any kind of, you know, near term incentives for large scale onshore wind and solar. Zosia I wanted to ask you to what extent will corporate PPAs soften that blow?
Zosia: Well I think for Lightsource certainly in the UK at the moment our focus on immediate development opportunities is entirely around corporate PPAs. So as we stand today, we will be developing projects, focussing on those where we can secure a corporate offtaker in order to develop that project. So they're very important to us now in the subsidy free world. Moving forward is the dynamic with the market change, as prices change you know that provision may change for us, as we stand today that's where things sit.
Jonathan: So in the past, in the recent past, we've had a number of these types of agreements signed alongside the presence of an incentive such as the renewables obligations. Is that ultimately the ideal situation or can a corporate PPA on its own provide just as much potential benefit?
Zosia: So again this comes back to the distinction between a sleeved PPA and a private wire PPA. So RO, renewables obligations and the long term fixed price corporate PPA with RPI indexation is, I suppose, your platinum solution as it were. In the absence of any subsidy in order to deliver a sleeve PPA, then we're looking for pricing that roughly hits with parity and I think that remains a stretch for solar projects in the UK currently.
If we are looking at private wire PPAs, whereby the power is delivered directly to site behind the meter, then the pricing discussion between the large end user, the energy consumer and the developer is a different conversation we're talking about, a fully delivered cost effectively, rather than competing purely with a wholesale market price. So yes, as I said there's distinctions between whether we are talking about a sleeved PPA or private wire PPA in that context.
Jonathan: OK. I mean on the topic of the different structures available, taking private wire PPAs first. Gus I mean presumably for you this is perhaps, this is the easiest to structure, would you say?
Gus: Yes. I mean certainly, in terms of the legal structure, the private wire, direct wire PPAs are the easiest solution. I guess practically the big limiting factor around the direct wire PPA is the need for the corporate to have a demand for power that's close to a suitable site for the power station. So that really is the main limiting factor of a direct wire PPA.
But legally you're right, the contractual structure for that PPA is much more straightforward. Whereas the sleeved PPA is a more complicated beast from a legal perspective. But practically there are not the same limiting factors.
So these sleeved PPAs, so for those projects where the project isn't located in the immediate vicinity of the corporate's premises, the structure requires the involvement of a licensed electricity supplier and that's because the corporate hasn't otherwise got the necessary contractual and regulatory permissions to have the power conveyed across the power grid.
So in this structure, the corporate entered into the PPA with the generator and agrees to purchase the power from the power station but then, in order to get the power from the generating station to the customer's source of demand, the corporate contracts with the licensed electricity supplier and agrees that the licensed electricity supplier will take the power at the power station and then supply the power back to the corporate at the corporate's premises. So you can see that legally it is a more complicated structure because of the tripartite nature of it involving a licensed supplier.
Jonathan: But presumably, because it removes the need for a corporate to have, you know, the ability and the permission to develop or have the project sited nearby, that opens up to a far bigger market would you say?
Gus: It does. But as Zosia has alluded to, the pricing isn't necessarily … the economics don't necessarily, aren't as straightforward for the sleeved PPA because with a direct wire PPA you've automatically got that, the saving of not having to pay the grid costs for example. Whereas in the sleeved PPA stretcher you're not avoiding those grid costs, you're still using the national infrastructure so you will still need to pay for those, for that use.
Jonathan: We're in a world at the moment where there seems to be constant talk about the potential demise of the utilities. To what extent do you feel that this could be a major role for them in the future to kind of make up for that?
Zosia: Well I don't think, well certainly, for solar we're not talking about replacing the role of the utilities, currently. Potentially at some point in the future with a combination of onsite technology, demand, management and storage we could get to the place where very large end users start looking at dislocation from grid, but I think we're a long way away from that now and there's still certainly a role for the utilities in providing power to end users even where there's a private wire PPA in place or, as Gus said, in sleeving that power if we're talking about a sleeved PPA rather than a private wire PPA.
Gus: I think that must be right Zosia. I don't think we're, in the short term I can't see that we are ever going to do away with grids. I can't see that everyone will have their own onsite source of power. I'm not sure that would in the short term be an efficient way for us to proceed. But I think what you have perhaps hit upon there is something that has been identified recently which is, there is a growing amount of onsite generation and that growing amount of onsite generation might need us to think again about how we charge for and fund the national networks.
So in OFGEM's recent charging review it has identified this as one of the topics that it is considering, the topic of whether those people with onsite generation are under the current charging arrangements, paying a fair share for maintaining the national grids, their fear being that as these onsite sources of power proliferate the cost of the grid falls onto an ever smaller pool of people paying for it.
Jonathan: Yeah. So do you think that the kind of direction of travel will be obviously to try and mitigate for that?
Gus: Well it certainly seems to be on the agenda, it's pretty early stages really for that OFGEM consultation and we haven't really seen anything really in terms of direction of travel other than the fact that it's on OFGEM's radar.
Jonathan: Zosia, anything to add on the charging review?
Zosia: No, I mean I think as ever we're hoping for some level of stability and certainty within the market place and, you know, I completely understand OFGEM's intentions behind this review, but we're hoping that we do get some certainty from that process fairly quickly in order that it doesn't frustrate the process of development of onsite or near site projects. I suppose also just, you know, we need to concentrate all of the existing onsite infrastructure and assets such as CHPs.
I suppose effectively for years it has been allowing people to avoid some of the grid charges for onsite generation. So yeah, for me it's an interesting thing to have been picked up now. I think responding very much to an anticipated uplift in onsite generation but the extent to which we really are going to see the rise in onsite generation. The extent that may be expected is unknown really.
Jonathan: OK. Alright, well moving on a little but kind of on a related note, I wanted to talk about battery storage. Now this is obviously something that people constantly talk about these days so cheap battery storage, presumably could this, perhaps to borrow a cliché, be a game changer for corporate PPAs, Zosia?
Zosia: Absolutely, I think it will be. It isn't yet.
I think if you take something like solar or equally a wind project and you add on storage then you've got a more powerful project than you might otherwise have. Why would you add on storage? Well, essentially there are three main reasons we see.
One is where there is…you're behind the meter and there's a lack of export capacity and therefore the battery can absorb some of that risk associated with that lack of export capacity.
The most common reason we see people looking at storage at the moment is to participate in DSR or demand side response activity. So effectively, to generate revenue streams from participating in some of the demand side mechanisms in the marketplace.
Then ultimately, I suppose the longer term view on storage is that, as I mentioned, this will help with dislocation from grid or whatever the term to be used around that is by extending, by storing power to be able to use when it's needed onsite, rather than when it's being generated. So once we get to the point where those three things are…well, storage is economically viable under those scenarios, then certainly storage will unlock the power purchase agreement market.
However as we stand today I don't think we're quite there yet, either in terms of revenue certainty around the economics of the income streams or the pricing associated with the battery storage.
Jonathan: Yeah and Gus have you…would you agree that we're kind of at that stage of the cycle?
Gus: Yes very much so, and as you say batteries are definitely something that's talked about a great deal at the moment, but we're still at the relatively early stages in terms of UK deployment.
I think you're right though that combining a battery with a source of generation and that source of generation being embedded behind the meter at a customer demand site, although that's probably the most complicated way to deploy batteries, it's probably going to be the most economically advantageous because it does give you so many buttons and levers to press and pull in terms of accessing the different income streams, both through the sort of deferring grid reinforcement costs or power price arbitrage and also the demand side response, balancing services and capacity market opportunities.
So yeah, that I think will be very much part of that…of any discussion around an onsite project, an onsite generation project and adding in a battery just to give it that extra flexibility.
Jonathan: OK and I just wanted to kind of round off the talk about differing structures for corporate PPAs. So the last one we haven't really looked into is the virtual PPAs. So I mean again, do you see much of this type of agreement, Gus, and you know, essentially how does it differ from the rest?
Gus: Yes you're quite right Jonathan and really the virtual PPA is similar to the sleeved PPA in that it's to be used where the generation project isn't in the immediate vicinity of the corporate premises.
It differs from the sleeved PPA in that's it's not really, it's not really a PPA I guess is one way of putting it. But, rather than purchasing the power, rather the corporate purchasing the power, selling it to a supplier and then the supplier supplying it back to the corporate, which as we said is a relatively complicated legal arrangement. Rather than that structure, under the virtual PPA it's more of a financial instrument, it's more of a contract for difference.
So that, rather than the physical power changing hands, the contracts are looking to establish whether the market price, which is being paid by the corporate in the supply market, is higher or lower than an agreed strike price. Where the corporate is paying more than the strike price, then the generator pays money to the corporate. Where the corporate is paying less than that strike price, the corporate pays money to the generator and in that latter scenario that top-up from the corporate to the generator when combined with the generator's income from selling its power again takes the generator up to around about that strike price.
So it's less of a PPA, more of a contract for difference and it's…and it can be used in the UK and has been used in the UK, but is tended to be used less often in the UK than the sleeved structure and I think that's really a perception as much as anything else. I think people feel that the credentials are stronger in using the sleeved PPA, but where the virtual PPA has been mentioned a lot more in recent years is that virtual PPAs are in some jurisdictions the only way to structure these deals and so in the US in particular they tend to use virtual PPAs or synthetic PPAs far more than sleeved PPAs and for that reason we have started to hear and see a bit more of virtual PPAs in the UK.
Jonathan: OK, and Zosia is this an area that interests Lighsource at all?
Zosia: I don't think particularly it's an area of focus at the moment. For us there's limited additional benefit over a private wire or sleeved PPA and certainly at the moment our focus is predominantly on private wire PPAs because the economics of the sleeved or virtual PPA are just difficult at the moment.
Jonathan: OK moving on then. I mean Inspiratia has a particular focus on or historically on project financing. Now you know a number of projects have successfully raised project finance in the presence of a corporate PPA, but you get the impression that it's perhaps not the first choice of the banks or other investors. Do you feel this is something that the financing community just has no option but to get really comfortable with now? Zosia if you wouldn't mind…
Zosia: I think so. I think as with any of these things in the early days there was a lot of work to be done to get people comfortable with the concept and to explain it and that involved all of the stakeholders in the process including those financing the projects. Moving forward, someone said to me last week, there's not an infinite number of corporates with an enormously strong credit rating. So in order to make these things work the projects have to be structured appropriately and we need to be talking about the right project for the right corporate counterparty. But if this is where we are going through the development in renewable projects in the UK over the coming years, then certainly you know more organisations will have to get used to the idea.
Jonathan: Gus how do you structure those agreements to appeal to the funders?
Gus: Well as Zosia said, it does very much come down to the creditworthiness of that corporate offtaker and different corporate offtakers will present a different prospect in terms of credit rating as compared to a more traditional utility offtaker.
But in many sectors it…well certainly some sectors, the corporate can present a more attractive credit worthiness than a traditional offtaker. I mean some of the very high profile recent transactions involving people like Google, Apple and Ikea, these are all very large organisations with very healthy balance sheets that present a better prospect than many more traditional offtakers. But then other corporates in other sectors will present a different aspect and, as Zosia said, there's not an infinite number of infinitely wealthy corporates.
I guess the other factor to bear in mind is issues around which part of the group is entering into the contract, are we entering into the…Is the corporate using a local operating company or hoping to use a local operating company to enter into the contract? Will the corporate back that up with a guarantee from the ultimate parent? Those sorts of issues.
I guess again there's a need to distinguish between the direct wire PPA and the sleeved PPA because the direct wire PPA is going to have an issue around the long term use of the site to which it's connected. I mean ultimately that can be overcome via a commitment from the ultimate parent, but its certainly worth bearing in mind that with a private wire PPA there is the need to plan for how the power is sold to market if the corporate closes that particular site.
Jonathan: OK and it has been suggested to me previously when I've looked at this subject and I wanted to kind of check whether you feel this is the case, but it has been suggested to me that there's perhaps more demand from the corporates for these types of agreements than there is supply for projects. Is that something you would agree with, Gus?
Gus: I'm not sure I would necessarily agree with that. I mean certainly, I've had conversations with generators who would express the opposite view and are struggling to find willing serious credit worthy offtakers. So I imagine that the difficulty that both generators and developers are finding, particularly in the sleeve PPA world, is finding PPAs at a price that works for them. I think that's the real struggle for sleeve PPAs at the moment.
I think direct wire PPAs is a different issue and I think the struggle there is finding suitable sites. But Zosia I'm sure will have a view on that.
Jonathan: Yeah well Zosia, are corporates clambering to Lightsource to…
Zosia: …[laughs] So I think again just echoing Gus' sentiment there on the private wire, direct wire PPA. Yes, we have a number of corporates approaching us and equally we're very happy to supply any corporates with PPA if they have suitable sites and suitable sites is really one of the key limiting factors at the moment.
So the right demand in the right location, you know they're few and far between, however we are developing a number of projects at the moment. On the sleeve front I would actually say that the market has changed in the last two to three years. We've seen a number of large credible energy buyers in the UK have now committed to PPAs. Perhaps they've got sufficient PPAs in place to meet the level of their demand they would wish to have on a long term contract aligned with the hedging strategy and we've seen the secondary market picking up.
So what I mean is that we are not only looking at PPAs now for new to us projects that will be developed subject to that PPA being put in place and the project finance being raised against that PPA. But we're also seeing projects that are existing assets coming out to market to end users for PPAs whereby they may have had a short term utility PPA in place or they may have been refinanced for example.
So actually, no, I would say my view on the marketplace would possibly be the opposite of that in that we've seen increasing numbers of developers and generators become familiar with the idea of the corporate PPA and therefore now supply possibly outstrips demand.
Jonathan: OK and staying with you Zosia, you're talking about the market evolving. So let's say five years down the line what's it going to look like?
Zosia: I think we're going to have PPA accepted as a fairly standard approach to how people buy their electricity, just as looking back 15 years ago flexible electricity contracts were a new idea and initially started at the very top end of the market. That's now been accepted as a fairly standard and usual way for a large energy consumer or even a smaller energy consumer to buy their power.
I think PPAs will be incorporated into the energy purchasing approach of many organisations and that PPAs will evolve not only into your traditional long term fixed price PPA sleeved or private wire, but you know there will be multiple facets to PPAs and as we mentioned earlier some of those incorporating storage and some not.
Jonathan: OK and Gus your thoughts on the future?
Gus: Yes I would echo that. I think the way that the power market has tended to work on the supply side has been that these relatively complicated structures have filtered down and become much more commoditised and we're increasingly seeing PPAs as part of flexible pricing mechanisms in supply contracts and think there's also a prospect of peer to peer, I know a lot of…I know a handful of people at least are looking into that as an option.
So some sort of peer to peer platform that seeks to introduce generators to demand customers in a way that can make that happen. Not just for large corporates under long term contracts but for much smaller entities on a much shorter basis. So I think that will be interesting to see whether that takes off.