Corporate Power Purchase Agreements (cPPAs) have earned a reputation for being one of the most impactful energy procurement options for companies wanting to reduce their scope 2 emissions. A cPPA allows buyers to enter delivery contracts directly with renewable project developers, to secure a long-term deal to purchase their electricity. By hedging the cost of electricity in the long term, rather than the short term, companies can realize considerable energy savings while stimulating the growth of clean technologies and meeting sustainability commitments and goals.
But the nature of cPPAs makes them more complex and challenging in comparison to a normal energy procurement contract. This is because they require a higher degree of accuracy in volume forecasts, the bullishness of the hedging mechanisms and the great emphasis on a good credit rating.
Besides the complexity, you may encounter challenges when looking to engage in a long-term contract, in the following areas: intricate alignment with stakeholders, length of the contract, multi-country jurisdictions, and more recently the wholesale market volatility. There are certain aspects which should also be taken into consideration when entering into a cPPA, namely, price monitoring, payment term conditions, smooth reconduct of the supplier contract (for tripartite contract structures), and optimization of the negotiation process.
A lack of new projects with a Commercial Operation Date (COD) in the near future caused in part by the increased cost of permitting and interconnection due to holdups in some markets and Covid-19-related supply chain interruptions means we’re in a sellers’ market. Furthermore, recent energy price increases mean there are even more barriers for companies trying to engage in cPPAs. There are risks involved in the negotiation process which can make or break the cPPA, which is why in these uncertain times it’s never been more important to get it right.
How you can optimize your cPPA negotiation process:
1. Monitor market conditions: In an ever-changing energy landscape with wholesale market volatility, it is essential to keep your options open when it comes to both contract structure and pricing.
- Monitor the market and request a new pricing structure from the supplier for insight into any other options available, such as a move from fixed to market-based pricing.
- Closely monitor market conditions and maintain a close relationship of transparency with your PPA advisor so that you can make quick and efficient decisions at the most opportune moment.
- It is essential to uphold engagement with a viable back-up supplier and developer through maintaining the engagement with the short- listed candidates.
- Maintain continuous engagement with the client, developer and supplier to identify any possible risks at the earliest opportunity.
3. Keep on top of ’deal-breaker’ clauses: cPPAs are negotiated on a country-by-country basis, meaning that different companies (i.e., developers, suppliers) could have different interpretations of certain clauses or certain country specific requirements. Transparency is key at the proposal stage. At that point any clauses which raise a red flag can either be discussed or negotiated early and avoids leaving negotiations to the final stage which may increase the risk of back-out. This also demonstrates the importance of having back-up offers available throughout the entire process.
4. Identify risks concerning the number of legal entities involved and set timelines for action: In any cPPA negotiation process there are several parties involved from each entity, including your own legal entities and legal teams (especially if the signing entity is based in a different country to the cPPA), and the legal teams from both the developer and the supplier. This can pose a challenge and lead to delays in contract finalization, so should be well managed from the start.
- Timelines should be set in advance for reviews in order to ensure availability of personnel reviewing and to remain within the agreed timeline.
5. Obtain commitment from end of line signatories: Final signatures on the cPPA can also be a time-consuming process. When considering the need to move quickly or secure a specific price, it is essential to be able to sign within an appropriate period. By agreeing with all parties to schedule the signature date in advance you can ensure availability and timely commitment.
DNV has identified these risks through experience in various markets and uses this knowledge to help companies to optimize the final stage of the process in cPPA negotiation. Find out how we could support your business with end-to-end services along the corporate PPA journey, from the development of procurement strategies to soliciting proposals and executing cPPAs.
For more information and cPPA advisory services, please reach out to us.