Corporate PPAs: uptake strong despite Covid impact

Companies around the world sourced a record 27.3GW of clean energy through corporate power purchase agreements (CPPAs) in 2020 despite the impact of the Covid-19 pandemic, according to research by Bloomberg New Energy Finance (BNEF). The use of CPPAs has steadily increased over the past few years, with markets particularly buoyant in the Middle East, Europe and North Africa (MENA) region and Asia-Pacific.

Commercial and legislative levers are beginning to impact CPPA deployment. The trend of big businesses exerting their influence over their supply chains to increase the sustainability of what they purchase shows no sign of reducing. Consumers are more influenced by the impact their spending habits have on the environment than ever before while institutional investors, encouraged by initiatives at industry and government levels, are increasingly using their influence to shape the strategic direction of the companies in which they invest.

At government level, the impact that CPPA deployment by significant energy consumers can have on hitting national and multinational renewable energy and emissions targets has not gone unnoticed. Last year, Taiwan announced renewable energy sourcing requirements for large energy users: Taiwanese companies signed 1.25GW of CPPAs in 2020, according to BNEF. We can expect to see an increasing role for policy and legislative influence on corporate decision-making as the market continues to develop.

What is a corporate power purchase agreement?

A CPPA allows a corporate entity to contract directly with a generator of electricity to use in its facilities and operations. CPPAs invariably contain requirements on the generator to provide evidence that the electricity is from a renewable or clean source, for example through the use of guarantees of origin. This in turn allows the business to demonstrate the sustainable purchasing choice it has made.

CPPAs are often, but not always, based on payment of a fixed price for a fixed period of time. This provides generators with sufficient certainty of revenue over a long enough period to secure the viability of their project, and commit to constructing it. For the business, demonstrating that its purchasing commitment has resulted in the construction of a new wind farm or solar park is a powerful message of its commitment to sustainability, with far reaching benefits from branding to investor relations.

Several models of CPPA are in use around the world, for both projects which are physically connected to the corporate consumer and those which are remote and supply electricity via the local transmission or distribution system. The CPPA may be a physical supply arrangement, or a financial product providing price certainty to both parties without a physical supply of electricity. It can combine supply of other commodities, such as gas or steam.

Given the global tilt towards renewables, it is perhaps unsurprising that there has been a significant increase in the use of CPPAs throughout the world over the last decade. Global CPPA volumes have increased from 0.1GW in 2010 to 23.7GW by the end of 2020, up from 20.1GW in 2019 and 13.6GW in 2018, according to BNEF. The US is by some distance the largest market for CPPAs, although the BNEF figures show EMEA CPPAs nearly tripled in volume during 2020, from 2.6GW to 7.2GW. Companies in the Asia-Pacific region also purchased a record amount of clean energy, totalling 2.9GW, BNEF said.

Impact of Covid-19

Of course, one factor which is unique to 2020 is the impact of the Covid-19 pandemic, which has proven to be more infectious and to have a wider global impact than was the case with other recent disease outbreaks, such as SARS. The 'powering down' of demand of many industrial consumers as a result of national 'lockdowns' and other regulatory interventions will have resulted in a cumulative global fall in electricity demand by the end of 2020, estimated at 6% by the International Energy Agency (IEA) Global Energy Review.

This drop in demand will have a knock-on effect on global energy prices. The IEA also anticipates that the addition of new renewable electricity capacity in 2020 will be lower than previously forecast, and 13% less than 2019. It has suggested that this will be due to "possible delays in construction activity due to supply chain disruptions, lockdown measures and social distancing guidelines, and emerging financing challenges".

It is likely that these reductions in demand and construction of new capacity has had, and will continue to have, an impact on the market for CPPAs, although the BNEF figures are encouraging. Some measure of ongoing restrictions around social distancing and working from home are likely to be needed for some, if not all, of 2021, and potentially beyond, while the societal change towards new working patterns which has been hastened by Covid-19 is yet to be fully understood, but is likely to be significant, with a corresponding impact on corporate demand.

We have seen evidence that companies are more hesitant to enter into new CPPAs at the moment, given uncertainty around electricity demand and energy prices. For example, retail clients with large numbers of physical stores are trying to establish whether the shift to online retail will be permanent and, if so, the impact on their store presence and electricity use.

However, it is likely other forms of demand will increase in the coming years. As more organisations rely on cloud storage, for example, the demand for data centres - which tend to be highly electricity and cooling-intensive – will increase. Some providers of cloud services, such as Amazon, are already among the largest CPPA offtakers. Electrification of heat and transport will also produce a significant upturn in electricity demand, which may contribute to increased scope for entering into CPPAs.

Although difficult to say with any certainty, it feels more likely than not that any downward trend on CPPA deployment caused by Covid-19 will be temporary. Recent vaccine announcements raise hope that businesses will begin to gradually return to certain pre-pandemic normalities as 2021 progresses, meaning they can once again focus on sustainability targets and other longer-term concerns.

Join Pinsent Masons for a virtual event, Powering the future: the opportunities which corporate power purchase agreements present to accelerate the path to net zero on Wednesday 28 April.