CORPORATE

ENERGY
SERIES 21-22 MAY 2019
PARIS

EXPLORING
RENEWABLE
ENERGY
POWER PURCHASE
AGREEMENTS
HOW EUROPEAN COMPANIES CAN USE PPAS TO
ACHIEVE ENVIRONMENTAL + ECONOMIC GOALS

Written By
Schneider Electric Energy
& Sustainability Services

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INTRODUCTION

There is a revolution underway, as more and more companies worldwide commit

to using large-scale renewable energy. Corporate demand has helped to drive the
rapid uptake of renewables and continues to bring renewable solutions to market in
a growing number of countries. By the end of 2018, corporations had procured more
than 32 gigawatts of renewables since 2008 via offsite, long-term power purchase
agreements (PPA)—and show no sign of slowing their pace.

European companies have a particularly strong appetite for renewable energy given
generally ambitious targets. There has been a corresponding shift in the political and
regulatory environment as a result, making the overall market for European PPAs more
favorable.

What’s driving this widespread adoption, and why now? Typically, companies source
renewables for one of four reasons.

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1. ECONOMICS
Renewable energy is now one of the lowest cost sources of electricity and is predicted
to continue to decline in price. Recent studies indicate that Europe could transition to
a fully renewable grid without a corresponding increase in energy price. PPAs can help
companies save money on their electricity costs by transitioning to renewables.

2. ENVIRONMENT
The Renewable energy directive requires a shared effort from all EU-member countries
to achieve a minimum 32% share of renewable energy by 2030. Beyond legislation,
hundreds of companies worldwide have set voluntary goals to either reduce emissions
or acquire renewable energy. Research shows that companies that set and announce
these goals publicly accelerate their progress and are more successful at receiving
project funding and investing in innovative technologies.

3. POWER PRICE MANAGEMENT

The EU is exposed to significant price volatility in energy cost. This expected volatility
puts corporations in a precarious position. PPAs provide a means for companies
to hedge against volatility by locking in a fixed price for power and protecting
organisations from both forecasted and sudden price fluctuations.

4. REPUTATION
Stakeholders of all kinds—including consumers, employees, and investors—care about
corporate responsibility, and businesses face increasing pressure from these groups to
be more sustainable. By using renewable energy, companies can reduce their carbon
footprint and improve the environmental profile of their goods and services, increasing
their attractiveness to all stakeholders and protecting themselves against future risks.

In this report, we’ll review what corporate PPAs are, how they are structured, and how
European companies—and those multinational companies with European operations—
can explore this valuable contracting structure to achieve their own environmental,
economic, or societal goals.

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UNDERSTANDING OFFSITE RENEWABLE ENERGY PPAS

A PPA is a long-term, large-scale, wholesale contract between a power generator (or

developer) and a buyer (or offtaker). Energy pricing is guaranteed by the offtaker to the
seller at a pre-agreed price per unit for a set period, typically a minimum of 10 years for
new renewable assets. In turn, the power generator uses the offtakers’ commitment to
demonstrate project viability to financiers, who are then willing to front the significant
capital required to build the project.

Historically, PPAs were contracts directly between developers/generators and utilities.

However, beginning in the U.S. in 2008, private and public organisations began
contracting directly with developers, effectively bypassing utilities.

PPAs have become appealing in Europe over the past several years for three key reasons:

1. Subsidy schemes have begun to expire, been amended, or been removed (in Spain,
the U.K., and Poland, for example), consequently driving power generators to corporate
offtake.

2. Install/capital costs have been dropping, making PPAs increasingly competitive with
conventional sources of supply.

3. PPAs provide greater certainty when it comes to making environmental claims.

Higher demand for Guarantees of Origin (GOs) may increase the price and volatility of
these commodities when purchased on the open (unbundled) market or as part of a
green contract.

PPA STRUCTURES

Corporate offsite PPAs can be structured in several different ways, depending on

technology type, location, and risk profile. The most appropriate PPA structure will
deliver the best project, at the best price, for the least amount of risk—and will satisfy the
corporate buyer’s goals or procurement strategy.

PPA eligibility is typically defined by a company’s load location. PPAs are permissible
in deregulated markets that allow independent power producers to build a project
and sell that power onto the grid. Market and political dynamics also figure into the
determination. For example, corporate PPAs have not yet become highly attractive
in Germany or France because there is alternative, and better, pricing for developers
(mainly due to subsidy). However, this is changing, as the appetite for corporate offtake
in these countries grows.

The two most common corporate PPAs are direct PPAs (DPPAs) and virtual PPAs
(VPPAs).

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DPPA

The most common PPA structure in Europe to date has been the DPPA (also known
as a physical, retail or retail-sleeved PPA). In the DPPA, the offtaker and developer share
a grid that enables the physical delivery of purchased power, via a 3rd-party market
provider, such as a utility. The PPA either locks in a fixed price for power or provides a
discount to a wholesale power index with a price floor, which can be tailored to hedge
financial exposure against volatile conventional power prices in the market in which it is
contracted.

In some cases, a direct physical connection to the source of renewable energy

generation may not exist. In these circumstances, the generator can appoint a third
party (a licensed utility, balancing party, or market participant) to deliver the power from
the source. This is known as sleeving.

DPPAs rose to prominence under the ROC scheme in the U.K. and have been used by
companies including McDonald’s and HSBC to address their needs.

DPPA ADVANTAGES DPPA CONSIDERATIONS

• Hedge effective—but need a large, • More complicated deal structure,
centralized load (such as a factory) because it involves a retailer/sleeving
• Accounting treatment is easier for IFRS partner and wheeling charges to deliver
companies power to operational site
• The more familiar structure makes it • May demand a minimum load size
easier to obtain internal approvals • Requires centralized load to remain
consistent for term of agreement

VPPA

Although less familiar to a European audience, VPPAs (also known as synthetic

or financial PPAs) have been the predominant contracting mechanism for most
companies that have executed PPAs globally. European interest in VPPAs is evolving,
and businesses are increasingly considering and contracting them.

In a VPPA, the corporate offtaker contracts directly (using a fixed price or a discount
to a wholesale power index, with a price floor) for the renewable energy with the
developer. However, the offtaker does not take physical delivery of the power in this
case. The power is sold into the wholesale market, while the buyer continues to get
its electricity from its usual retail supplier. The VPPA is a financial instrument that 1)
replicates the economic effect of a DPPA (while cutting sleeving costs) and 2) delivers
the environmental attributes associated with the project, allowing the offtaker to make
renewable energy and/or carbon reduction claims.

As there is no physical delivery of power in a VPPA, the buyer and the generator do not
have to be co-located in the same grid region. This provides significant flexibility to the
buyer, who may have operations in Germany, but use a VPPA to procure renewable GOs
in Spain that can, at present, be cancelled for the country of consumption (subject to
guidelines from bodies such as the Association of Issuing Bodies [AIB] and the RE100).
Under the VPPA model, the offtaker can go country-by-country to identify the best
projects at the best price.

How to account for a VPPA has troubled some companies. Companies under IFRS
accounting standards will need to closely assess VPPAs to understand if derivative
accounting may apply.

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VPPA ADVANTAGES VPPA CONSIDERATIONS
• Useful to address disaggregated load • Environmental attribute ownership
• Greater flexibility to choose a project and cancellation depends on market
that satisfies a company’s needs boundary
• Allows companies to source the most • Bypasses the hedge benefit of retail
economically competitive renewable contract replacement in a DPPA in
project within a larger market boundary exchange for greater choice
• Conveys additionality for a new project • Accounting is more complicated, but
• Separate from retail load and price provides greater power contract flexibility

HOW TO EVALUATE PPA STRUCTURES

IN EUROPE
Both DPPA and VPPA contracts require consideration, as they have legal, financial,
treasury and accounting implications. Risks must be carefully managed, and corporations
need to clearly understand the terms and conditions of the contract and its affiliated
environmental attributes (particularly if they wish to use these attributes to make carbon
reduction claims). It is critical to engage a buyer’s advisor like Schneider Electric Energy &
Sustainability Services to help navigate deal complexities. Companies that have successfully
addressed these concerns are using PPAs of both types to achieve their environmental and
economic goals.

CONSIDERATION DPAA VPAA

Subsidization May apply, depending on region. May apply, depending on region.

Uses PPA structure to offset costs of While typically less effective than a financial
Financial Hedge conventional procurement needs, but must hedge, flexibility to choose best priced and
have centralized grid load. lowest risk project in open market.

International accounting rules (IFRS) may

Same accounting treatment as any typical
Accounting trigger derivative accounting; US accounting
procurement of electricity.
rules may avoid derivative scenario.

Retail Electricity DPPA is sleeved with retail electricity contract VPPA is independent from retail load and
Contract and may limit future flexibility in retail supplier. price, offering flexibility.

Operational load may be aggregated under a

Dependent on regulatory structure of market;
single project purchased in an open market
Region not available or competitive in every European
region to achieve larger economy of scale and
country.
more competitive price.

GOs may be cancelled from a single project GOs may be cancelled from a single project
Meets Target in the interconnected grid and applied to in the interconnected grid and applied to
multiple operational sites. multiple operational sites.

Internal approval process may be easier due

to familiarity with existing PPA structure, Internal approval process may be lengthy.
but does require separate wheeling charge Engagement from multiple organizational
Approvals
contract with retail utility/sleeving party. This stakeholders required; expect execution to
additional third party can introduce further take 6-18 months.
complexity to negotiations.

Claims available for new projects. Matching

Leadership/
load on a country-by-country basis is preferred Claims available for new projects.
Reputational Claims
by some parties.

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THE EMERGING CONCEPT OF A
PAN-EUROPEAN PPA

The predominant advantage of the VPPA is the opportunity for companies to aggregate
smaller energy loads under a single, pan-European project umbrella. In this model, the
environmental attributes (in Europe, GOs or renewable energy GOs [REGOs]) obtained
from the VPPA can be allocated to aggregated European electricity consumption.

For example, at present, if a company with operations in multiple European countries

executes a VPPA in Spain, the GOs from the Spanish project may be cancelled on
behalf of the consumption in all countries, so long as the countries have adopted the
European Energy Certificate System (EECS) in affiliation with the AIB.

CASE STUDY: LEADING THE WAY WITH A PAN-EUROPEAN VPPA

An RE100 signatory and global consumer discretionary business sought help to meet
its 100% renewable energy commitment. With large electricity load in Europe, the
company turned to Schneider Electric Energy & Sustainability Services to help address
its entire European portfolio with renewable energy.

The company’s goal was to secure a virtual PPA to meet its expected future electricity
load across the 26 countries where it has operations within Europe. After an extensive
process, inclusive of nine countries and over 40 developers, the company selected a
new build wind project. This pan-European PPA required innovation, collaboration and
market leadership on behalf of both the client and the Schneider Electric team. The
company is now on pace to reach its renewable energy goal ahead of its timeline.

THE VALIDITY OF THE

PAN-EUROPEAN PPA APPROACH
Corporate offtakers may be wary of this outside-the-box VPPA approach to address pan-
European environmental goals. However, leading NGOs support its validity:

• Recent GHG Protocol Scope 2 guidance from the World Resources Institute (WRI) has
clarified that environmental attributes, otherwise known as Energy Attribute Certificates
(EACs), may be purchased and used across an interconnected grid region. At present,
this means that EACs obtained from one part of the European grid may be applied
elsewhere in the European grid, so long as both countries have adopted the EECS,
which defines a common market boundary.

• This practice is consistent with RECS International’s Renewables Good Practice

guidance, which stipulates that “by limiting procurement to current grid connected
areas, market-driven incentives are inevitably limited in their potential ability to include
cost-effective areas for renewables production. Market areas should be as large as
possible and interconnection should not be a necessary prerequisite for renewables
procurement in all cases.”

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• RE100 and CDP reporting is also consistent with the GHG Protocol guidance. Claims
must be made in the same market where both load (location-basis) and purchase of
the EACs (market-basis) occur, and, at present, European countries that have adopted
the EECS guidelines are treated as a single market.

KEY EUROPEAN MARKETS FOR PPAS

SPAIN
Cost-competitive renewables and availability of flexible contract structures make Spain
a dynamic market. Due to volatile commodity costs, relatively high energy prices,
and strong renewable energy resources, PPAs are emerging as a cost-effective way to
stabilize energy prices and achieve carbon reduction goals. Both DPPA and VPPA deals
are possible and can be structured both with traditional fixed prices as well as market-
following structures.

UK & IRELAND
Historically, most C&I PPAs in the UK were direct under a subsidy scheme. Despite
the withdrawal of subsidies, wind and solar projects are becoming competitive with
traditional energy generators, particularly for private wire deals (where a large nearby
RE project is connected directly to a facility) that can avoid high transmission charges.
As renewables become more economically attractive, VPPAs are becoming possible
as well. Several corporations—including IKEA, Facebook, and Microsoft—have already
completed PPAs deals in the UK/Ireland. (Buyers looking at the UK or Ireland should
consider the implications of Brexit; it is recommended to work closely with a buyer’s
advisor.)

THE NETHERLANDS
The Netherlands has seen exciting developments in PPAs. In 2016, the Dutch Buyer’s
Consortium of Google, DSM, AkzoNobel, and Philips executed the first of several large-
scale wind VPPAs. Subsidies do still exist for renewables in the region, but new wind and
solar deals are increasingly cost effective on their own. Supply issues around GOs in the
Netherlands have caused a spike in price, which is squeezing corporate budgets, and
making the GOs supplied as part of a PPA contract even more attractive.

THE NORDICS
Though commodity costs have remained lower than many other European nations,
corporations are still choosing to execute PPAs in the Nordics. For companies with a
long-term mindset and renewable energy goals, there is attractive pricing, particularly
for new wind projects with the backdrop of several planned nuclear facility retirements.
Several large deals have already been executed, but most have involved buyers
relinquishing GOs to improve economic returns, which removes the ability to use the
PPA to make environmental claims.

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LOOKING AHEAD: GRID PARITY DRIVING
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FUTURE PPA CONTRACTS
As the price for renewable energy continues to fall, buyers have begun to see retail
supply offers for both traditional energy and renewable energy during their procurement
exercises. This is the result of market convergence, driven by price parity. As a result, some
suppliers have begun to bundle electricity together with PPA contracts.

While convenient, this model can be risky: typically, offtakers are not given insight into the
full risk profile of the PPA project they are contracting for and may not get the best price.
Best practice is to evaluate both independent and supplier offers side-by-side to ensure
that all contract terms and conditions are fully understood by all parties.

CONCLUSION
It is a dynamic and ever changing market for corporate renewable energy procurement,
and European buyers have more choices than ever for their electricity. Both DPPA and
VPPA contracts offer advantages but must be carefully evaluated for risk. And, as the market
continues to evolve, companies can expect to see new and emerging products and services
that require due consideration.

About Schneider Electric

Schneider Electric is leading the digital transformation of energy

management and automation in homes, buildings, data centers,
infrastructure, and industries. With a global presence in more than 100 countries, the
company is the leading provider of integrated efficiency solutions, combining energy,
automation, software, and support.

Schneider Electric Energy & Sustainability Services helps companies buy energy smarter,
use resources efficiently and drive sustainable growth. It delivers energy-to-end services and
technology to develop strategic goals and plans, implement programs and projects that
deliver measurable results and identify effective financing tools. Learn more today.

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