Corporate Power Purchase Agreements (CPPAs) have in recent years become an important way to reduce a business’s exposure to the hugely volatile energy markets and have a positive impact on overall emissions exposure.
A CPPA is a long term renewables contract which directly links an end user to a renewable asset.
Contracting a CPPA might seem like a simple process, however there are a number of key steps a buyer must consider to improve their chance of success in a market which is currently tilted in the favour of the generator.
Below we outline our 6 steps to successful CPPA contracting:
Currently the market is a seller’s market, meaning generators have multiple counterparties wanting to buy their volume. A buyer needs to be ‘contract ready’ to improve their chances of success. Do not think you are the only company in the process, there will be others. Knowing what a good deal looks like (term, price, technology etc.) will greatly improve the speed of your decision-making process.
We’ve highlighted how simple contracting a CPPA might seem. The reality is there are multiple legal and operational considerations which need to be agreed before a CPPA moves to contract signature. By gaining specialist advice, key risks can be identified, significant money can be saved and the final agreement will be future proofed and fit for purpose. It is important to remember CPPAs are long term commitments, so it is vital that time is taken to work through key details. Remember a saving of £2MWh on a 10yr, 50GWh CPPA is a saving of £1million.
To be ‘contract ready’ it is essential to have senior stakeholder agreement. Clearly breaking down your logic for contracting into simple understandable terms is key to getting internal signoff. The electricity markets can be very complicated and confusing, don’t assume everyone understands what you are talking about. If the messaging is not clear, it makes it easier to say ‘no’ rather than ‘yes’. Remember, senior stakeholders will be more concerned about the risks than the opportunities, so be prepared to be challenged. Scenario test your position against potential price movements and make sure you have checked internal accounting principles and sign off levels. Don’t fall at the first hurdle.
If you are undertaking a sleeved CPPA (meaning it is linked to your physical supply agreement), you should have dialogue with your electricity supplier as early in the process as possible. Let them know you are considering a CPPA structure so you can clearly understand their process. There is no downside in having these conversations sooner rather than later. The last thing you want to find out is your supply agreement isn’t fit for purpose after you’ve got sign off internally or you are about to sign Head of Terms. The majority of electricity suppliers know CPPAs well, meaning they can potentially offer innovative solutions—so talk to them.
Make sure you have a clear view of your forward demand profile. Any structured net-zero strategy will have multiple programmes of work in play at any one time. This should mean a clear forward forecast of electricity demand is in place. A CPPA is a long-term hedge of electricity, so contracting volume should not be above your forward demand profile as this will result in a sell back of the volume. Don’t assume demand is going to remain as it is today, because it will not.
This is one of the most important points in the whole contracting process and one which needs to be understood and assessed as soon as you consider entering into a long term CPPA contract. More agreements fail because of credit than any other element. So, make sure you understand your credit position and what assurance you will be willing to undertake if it’s requested. Generators are hugely concerned about credit default and will always take a risk averse view on most counterparties. So be prepared for credit assurance to be requested.
If you follow these 6 steps, we can’t promise a CPPA will be guaranteed, but your chance of success will increase dramatically. You will also be far more focussed on the right projects for your business.
At edenseven we have decades of experience in negotiating and placing CPPAs. Our team of experts help buyers and sellers in the contracting process, making sure both parties and relevant suppliers are operationally aligned.
If you are thinking about a CPPA as part of your decarbonisation strategy and would like practical guidance, please get in touch with the team at www.edenseven.co.uk
If you are thinking about a CPPA as part of your decarbonisation strategy, get in touch for a
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