Let’s start positively. We agree with the Department for Energy Security and Net Zero (DESNZ) and the Department for Business and Trade (DBT) that Corporate Power Purchase Agreements (CPPAs) could provide a market-driven solution allowing firms ‘to secure competitively priced electricity to enhance competitiveness while making progress towards Net Zero without increasing fiscal burden.’
There is a strong logic that effective, competitive CPPAs will encourage firms to step into the market and reduce the need for government support, taking some of the decarbonisation burden off taxpayers’ shoulders.
However, having worked with clients over many years sourcing, negotiating, and operating CPPAs, we doubt this will be achieved without some significant changes. CPPAs need to be elevated so they are not seen as a poor relation to Contracts for Difference (CfDs) by developers, only possible for large corporates, or as leaving difficult-to-manage risks with consumers.
The four elements below are not a complete panacea, but our experience suggests that without them, CPPAs will remain a specialist backwater.
Improving the appeal of corporate counterparties
CPPAs will remain the poor relation for developers while the CfD scheme has a counterparty (effectively the Government) that has better credit standing and doesn’t bear consequences on its own balance sheet. There are also fewer firms with sufficient demand to be the offtaker for all of a project, particularly as projects increase in size with technology improvements.
Some sort of credit support scheme is needed. The European Investment Bank (EIB) has developed over €10 billion of risk-sharing facilities with more than 50 banks to facilitate access to Power Purchase Agreements (PPAs) for riskier and smaller off-takers. This both addresses the creditworthiness gap and encourages developers to consider a wider pool of smaller consumers.
Stop double charging for decarbonisation
Firms that commit to CPPAs for new assets are contributing to achieving the country’s Net Zero target. Everyone that pays the CfD charge is covering government commitments towards Net Zero. Firms committing to CPPAs, unless they are for behind-the-meter assets, are paying twice: once for the CPPA and again through the CfD charge.
The solution is simple. To the extent that a CPPA is sleeved into a supply agreement, the volume should be exempt from the CfD charge. This will raise understandable concerns about the affordability of the CfD scheme. But if a CPPA means an asset doesn’t have to seek CfD support, the size of the CfD ‘pie’ shrinks.
Level the playing field
Read the call for evidence carefully: while a headline talks about competitive prices, the text notes that this is only under certain circumstances – at the beginning of an agreement, during periods of high market prices, or by avoiding ‘non-energy’ charges via behind-the-meter installation.
In many situations, therefore, a CPPA will not be competitive compared with the wholesale market. The creation of the Capacity Market (CM) was justified on the ‘missing money’ problem – wholesale markets don’t fund all generator costs. Parity with the CM should be extended to CPPAs. Like projects backed by the CfD scheme, CPPA-backed projects wouldn’t be able to participate in the CM, and the capacities can be built into the assessments of capacity required from an auction. For firms buying a CPPA, the volumes sourced would be exempt from the CM charge.
Develop firming indices
This idea needs more development but addresses a critical issue. For solar and wind projects, intermittency is inherent. The value of a CPPA as a risk management option, offering stable long-term prices, is seriously compromised by this intermittency. Buying pay-as-produced may reduce direct fees but shifts intermittency risk to the consumer, who is less well placed to manage it.
Some suppliers are stepping up and offering firming services that take on the intermittency risks and provide supplies equivalent to wholesale market products used for hedging. Most offers, however, are fixed prices for relatively short, fixed terms, which increases uncertainty over the total cost of a PPA in later years.
In the battery storage sector, benchmarks meet Financial Conduct Authority (FCA)-regulation standards. Indices need to be developed for firming solar and wind projects so corporates can make better decisions about the total costs of CPPAs and other options.