Understanding Corporate Power Purchase Agreements: A Global Analysis

Introduction

In an increasingly unstable and polarized world, securing energy supplies has proven to be a challenge, for both countries and private corporations. Energy plays such a big part in global politics and commercial exchanges that it is frequently used as a war weapon, keeping in mind the oil shocks of 1973 and 1979. The United States have agreed in 1945 to provide military support to Saudi Arabia in exchange for access to affordable Saudi energy. Ever since the outburst of the war in Ukraine in early 2022, energy has become the cornerstone of global politics, especially in Europe which does not produce its own energy (with the exception of countries such as Norway) and is dependent on its energy import from Russia, the Middle East and Africa. Accordingly, corporate entities and governments are making it now a mission of the utmost priority to secure energy supply, including oil, gas, and energy. Obtaining energy supply can be achieved through what is known as ‘Corporate Power Purchase Agreements’ (referred in this article as PPA). This article will focus on PPAs’ legalities and structures, its current use, and finally the balance advantages/ disadvantages of PPAs. 

 

Definition and Purposes of PPA

A PPA is a contract entered into directly between a provider (also known as ‘generator’) and a customer (also known as ‘offtaker’) which allows the customer to have a purchasing relationship with the generator, and hence obtaining energy without making an equity investment or needing a direct physical connection to the energy source. The first reason for entering into a PPA for a public or private sector organization with significant energy usage is to help spread the risks associated with price fluctuations by serving as a fixed price hedge against increasing wholesale energy costs. This reason will also be covered in more detail later on (although non-energy costs will still be payable in addition). Additionally, it can offer a legal connection to a recognizable source of renewable energy production. A PPA offers the prospect of an alternative route to market with a fixed price, or an inventive pricing strategy, agreed upon with the client, for the energy generator. Corporate PPAs have remained popular in the market for generator developers, mostly because creative and flexible long-term price arrangements may be reached. Others may be more cautious and look for guaranteed minimum power rates on which to base their lending decision, but some developers and investors are eager to take chances with regard to wholesale power prices. In the past, authorized suppliers have been risking averse and have either offered no floor price or a floor price that is low in comparison to the going rate in the market. When compared to existing floor pricing, higher fixed prices offered by corporations in the corporate PPA market can be attractive to generators and their funders who can factor them into their models of generating income and finance terms. In a nutshell, PPAs have become popular in the generator developer market mainly due to the innovative and long-term pricing arrangements that can be agreed upon.

 

When to enter into a PPA

It is relevant for organizations to enter into PPAs when:

1. otherwise, the project's predicted earnings would be unpredictable, therefore some assurance regarding the quantities bought and the prices paid is necessary for the project to be financially sustainable;
2. he PPA offers some assurance of being shielded from such competition; there is a chance of competition from cheaper or subsidized domestic or international competitors (for instance, where a neighbouring power station is providing cheaper power);
3. the majority of the product will be consumed by one or a few key clients. For instance, a public utility might be buying the energy produced by a power plant, in which case the government will want to be aware of the cost of its power as well as the fact that it has first dibs on it; and
4. the project business will seek financial security, while the buyer will seek supply security.

 

Contractual Structures for a PPA

 

1. Physical PPA

A corporate offtaker will enter into a long-term PPA (typically with a term of more than 10 to 15 years) with a renewable energy generator in order to take some or all of the energy produced by its plant (or portfolio of plants), with a defined amount of energy sold at a fixed price. This is done in accordance with a physical PPA. The PPA will include all of the terms controlling the sale and purchase of power as well as the allocation of any advantages related to renewable energy (such as green credits). Most of the time, renewable energy delivery is hypothetical. These clauses may also require the performance of or the procurement of specific metering and regulatory functions that may only be carried out by licensed energy suppliers in some jurisdictions, such as the UK. Therefore, in these nations, the corporate offtaker must sign a back-to-back contract with a licensed supplier in which the licensed supplier agrees to carry out these obligations.In addition to this arrangement, the corporate offtaker will typically have a contract with the licensed supplier for power supply under which energy may occasionally be given to meet the corporate off-energy taker's needs. The energy acquired under the PPA and passed through to the licensed supplier under the licensed supplier agreement will be considered in the terms of supply under this supply agreement. As a result, the corporation will benefit from the PPA's fixed pricing for renewable energy while also having the security of a supply contract with a recognized energy supplier to meet its ongoing energy needs.

 

2. Synthetic PPA

In a synthetic PPA, energy is not physically exchanged. Instead, a derivative contract structure is used in the deal, where the offtaker and generator agree on a set "strike price" for energy produced by a renewable energy station. Then, each party will sign individual contracts with their energy supplier or utility to buy or sell energy (as appropriate) at the spot price. The agreement then serves as a financial hedge: If the market price for power is less than the agreed price in the PPA during its enforcement period, the offtaker shall pay the generator the difference amount for power generated in that period. On the other hand, if the energy market price is higher than the agreed price in the PPA, the generator shall pay the offtaker the excess amount for energy generated in that period.

 

3. Private Wire PPA

With Private Wire PPAs, energy will often be sold to the offtaker directly from the generator's site, as opposed to hypothetically passing through a national power infrastructure, as is the case with the Physical PPA. The generating plant will typically solely provide power to the offtaker and will be situated at or near the offtaker's assets. Private Wire PPAs are frequently used in countries with unreliable grid systems or in situations where the offtaker wants to ensure its own source of power (for example, for use in a plant or in an off-grid site).

 

4. Back-to-back PPA

In a back-to-back corporate PPA structure, the offtaker contracts directly with the generator for the energy and then on-sells the energy to its own supplier, who credits the customer's energy account with the corresponding amount of energy. The supplier will typically supply those volumes to the customer at the same unit price as the supplier paid the customer (plus a supplier management fee). The terms on which the generator will sell and the consumer will buy the power will be passed-through by the customer to the authorized supplier under the back-to-back system. Regulation-related issues, project-specific concerns of the generator and licensed suppliers, and risk distribution among those parties will all need to be addressed. This will necessitate a more involved negotiation that touches on many of the problems that frequently come up in discussions of PPAs between a generator and an offtaker. 

 

Key Legal Clauses and Implications in a PPA

 

1. Force majeure

When circumstances beyond its control prevent it from generating in compliance with the offtaker's nominations, the generator will want to request force majeure relief. Examples include problems with energy transmission, a problem with the fuel supply, strikes, terrorism threats, or cyberattacks. If the offtaker is unwilling to accept delivery, it may also request force majeure relief.

 

2. Limitations of liability

In the event that it cannot supply according to the offtaker's requirements or cannot commission the plant by the scheduled commissioning date, the generator will want to minimize its liability to the offtaker. In these circumstances, the PPA would often include a provision for liquidated damages along with a termination right and potentially additional compensation with respect to the damages caused by the termination. 

 

3. Change in Law

The PPA will typically include carefully crafted provisions for changes to the law, such as those affecting aspects of the power market that have an effect on the PPA's economics. If the parties are unable to come to an agreement, they may be obliged to renegotiate the price or other aspects of the PPA using an expert determination or another dispute resolution procedure. In the case of a significant change in legislation that would otherwise make the performance of the PPA impossible, including a change in law provision will typically protect the PPA and allow it to keep being enforceable.

 

Advantages and Limits/ Risks of PPA

 

Advantages:

Since many of the big licensed suppliers have clients who are eager to enhance the proportion of renewable energy in their energy mix, they may look for generators interested in corporate PPA-compatible supply contracts. 

Customers and generators benefit from the corporate PPA in the following ways: 

• In contrast to what has historically been possible, the generator can frequently get a set price for its power over a longer time frame. The worst-case revenue modeling may benefit from this.
• Without having to compensate for the intermittent nature of a generator's output, the provider assumes the risk associated with the supply while the client continues to receive a consistent and steady supply. The licensed supplier performs the balance as part of its routine energy trading duties
•  For the selling and purchase of power, the generator and customer have access to a considerably larger market. By deciding on a fixed or floating price mechanism with the generator, the consumer can spread out its exposure to price changes. This can enhance the pricing policies outlined in its energy supply contract.
• By specifying particular goods and services that are powered by renewable energy from a particular producing facility, the corporate PPA structure lets the customer to show their dedication to renewable energy and carbon reduction goals.

Limits and Risks

PPAs, as an alternative method of acquiring power, are not without issues. Corporate PPA candidates must comprehend these risks and think about how to tackle them. The price, volume, and profile of the generated energy, as well as how closely these match an organization's demand, are the key risks involved with a corporate PPA. However, firms can acquire agreements that are sustainable in practice as well as in theory if the proper counsel and legal framework are in place. 

 

Conclusion

Although PPAs are now well-established in the US, UK, and Scandinavian markets, developers and off-takers are continuously searching for new legal frameworks to which to apply them. Due to the current global geopolitical dilemma, it appears that various European and Asian nations are expressing concerns and looking for measures to safeguard their energy supply. Several significant oil and gas-producing nations recently announced increased cooperation with European and Asian nations in need of such supply; just two examples include Algeria's substantial increase in supplies to Italy and Saudi Arabia's historic establishment of similar business ties with India. Due to the PPAs' positive economic and environmental effects, large, well-known corporations are entering into them by seeking proper legal advice from the best corporate lawyers frequently and investing in their own generation assets.