Force Majeure was one of the biggest concepts up for discussion in 2020. In 2021, the term ‘corporate PPA’ is earning its pride of place as one of the new buzz words for the power and energy sectors in the region, with sector players critically looking at how these types of arrangements can be used to address some of the cost and supply challenges facing the region.
In the energy sector, “PPA” stands for ‘power purchase agreement’, which is an offtake agreement where the Offtaker or Buyer (say KPLC or UETCL) agrees to purchase power from a power generating company, typically at an agreed price for a fixed term. Where a ‘utility’ like KPLC is the Buyer, it is known as a ‘Utility PPA’.
It follows then, that a ‘Corporate PPA’ is an agreement where a corporate entity is buying power from a power generating entity. Corporate PPA-type arrangements can take different forms and are often not as straightforward as Utility PPAs. We look into some of these types of arrangements in this article.
First, a Private Wire/Direct Wire PPA. This may be the more familiar arrangement, and involves the corporate entity purchasing power directly from the power generation company. This could include an arrangement where the power generation plant is located on the corporate’s own premises (in the form of solar roof top panels, for example) and the power generating company is responsible for installing and operating the system and then delivering the power to the corporate buyer. The power feeds directly to that corporate for immediate use at its own premises. These systems are commonly used where corporate headquarters have substantial power needs, space and available energy resource. The co-location of the generation plant and the corporate itself avoids the need for use of an external transmission network, and therefore the Utility company is not involved.
Second, a Physical/Sleeved PPA. Here, a PPA still exists between the corporate and the power producer. However, once the power producer has generated the power, it must use the Utility’s transmission/distribution network to transport that power to the corporate. The corporate will enter into a Supply Agreement with the Utility and pay a ‘sleeving’ fee for transmission of the generated power. This arrangement may be appropriate where there is no potential for co-location of the generation plant, or where the power producer services more than one corporate from its generation plant. The corporate is typically also able to specify what type of power they want (e.g. only renewable power) which can assist in meeting corporate environmental targets without the substantial capital outlay associated with a direct wire PPA.
Third, a Synthetic/Virtual PPA. Most commonly this is an arrangement with three aspects, used in regions where there is an open market for power. First, there is the ‘Synthetic PPA’ between the corporate and the power producer whereby those parties agree a ‘strike price’ for power sold under their arrangement. Then, under a PPA arrangement, the power producer sells to the open market at the ‘market’ price. Finally, the corporate, via a supply agreement, purchases power from the open market (again at ‘market’ rates). The extra aspect here is that once the power is purchased, the corporate and the generator make an adjustment for the difference between the price to the power producer by the Utility and the ‘strike price’ which is fixed in the synthetic PPA. If the market price paid is lower than the strike price, the adjustment will be in favour of the power producer. If the market price is higher than the strike price, the adjustment will be in favour of the corporate. Such PPAs therefore act as a financial instrument.
Each arrangement has distinct advantages. All of the types discussed above give a corporate control over the type of energy it uses, thereby enabling it to prioritise use of renewable energy and meet corporate social responsibility goals.
Direct wire PPAs may also make electricity available where a utility is unable to provide reliable power (for example, in remote locations). A good example would be the many remote lodges in East Africa, which have invested in solar panels as a means of reducing reliance on costly generators. Depending on the applicable legal framework, a direct wire PPA may also create an opportunity for generating revenue. Where power produced by a direct wire plant is more than the corporate’s needs, it may be sold back to the national grid for resale to other consumers.
Depending on the arrangement used, a corporate PPA may also provide more cost certainty than using a state-owned utility. A sleeved or direct wire PPA will allow the corporate to fix the applicable tariff for an extended term, thus reducing the impact of potential price increases which may apply to power purchased from a Utility. This can be an appealing prospect for corporates who need long term price certainty.
For all these reasons, corporate PPAs and similar arrangements are an attractive alternative to many large power consumers, and are likely to be increasingly considered by corporates when they evaluate their power needs and cost planning. However, at present, these arrangements are generally not a total power solution. They are almost exclusively developed in connection with renewable (and therefore intermittent) power. This means that, while power storage remains a challenge, most corporates must rely on a hybrid solution – using renewable energy corporate PPAs to cover some of their power consumption, and reverting to the national grid to pick up any surplus needs, particularly in peak times.
The article was published in the Business Daily on 6 April 2020 and can be featured here.