JLL Energy & Infrastructure Advisory Corporate PPAs: The Devil s In The Detail Description A volatile energy market and fluctuating wholesale power prices make the planning of future energy expenditure a difficult exercise. Power Purchase Agreements (PPAs) can provide stability and long-term savings in the wholesale cost of electricity, whilst funding growth of renewable energy. This is hugely beneficial for corporates as many have green energy targets towards which PPAs can contribute significantly. Clean electricity generation, particularly from wind farms, has seen a significant decline in costs making it cheaper than fossil fuels. Despite facing negative policies, a resurgence in cheap renewables could be seen if corporates understand the long-term benefits and apply appropriate messages to the government. Benefits The benefits of corporate PPAs are both tangible and intangible. They can help large corporates meet their green targets, whilst avoiding greenwash, as provided the power comes from a new wind or solar farm - PPAs can create additionality, i.e. new to the planet generation. Unlike certain green tariffs, PPAs can increase the quantity of renewable capacity as they act as secure revenue streams for projects looking to acquire funding. Due to the direct nature of PPAs, there is also a greater transparency over costs and the authenticity of the origin of electricity. PPAs should be viewed as a long term financial investment; they reduce the corporates exposure to market power price fluctuations and can result in cheaper power prices than the wholesale energy price which they would otherwise be exposed to over the duration of the contract. Security of supply is undoubtedly an issue for renewable energy, however through a PPA structure, there is no supply risk to a corporate as the physical flow of energy comes through the utility, meaning that the utility takes the supply risk during generator downtime. COPYRIGHT JONES LANG LASALLE IP, INC. 2018. All Rights Reserved 1
Structures Direct (Back-to-Back) PPA Direct PPAs effectively involve two PPA contracts; the first is between the corporate and the generator for the electricity, the second is between the corporate and the utility for the on-selling of electricity and renewable energy certificates. The corporate agrees a fixed price per unit of electricity (usually rising with inflation) which is paid to the generator, ensuring a secure revenue stream for the generator. The trading of Renewable Energy Certificates (RECs, which vary from country to country in their value and nature) evidences the green credentials of these agreements. The image below shows the contractual and physical flows of electricity. As the physical flow of electricity is through the utility, the corporate is not exposed to generator downtime and/or any intermittency. The corporate end user acquires the power directly from the generator for the electricity which is then sold on to its own licensed utility. This is then netted off against the actual quantity used from the utility. Unlike other PPA structures, the direct nature of this example lends itself to a more intricate and involved process; this does allow the corporate to be involved in project details if that is of interest to them. Due to the complex nature of these agreements, third party specialist advisers are typically required to resolve complex regulatory matters, risk allocation and credit arrangements which can impact on financing. COPYRIGHT JONES LANG LASALLE IP, INC. 2018. All Rights Reserved 2
Synthetic PPA: Price guarantee arrangement/cfd Synthetic PPAs represent an excellent streamlined opportunity to secure a long-term supply of clean energy without the complex regulatory issues which can affect the Direct PPA. There are two types of synthetic PPAs, the first of which is a price guarantee arrangement. This is essentially a contract for difference mechanism, with three agreements in place; a PPA between the utility and the generator, a supply and on-sell agreement between the utility and the corporate, and a price guarantee agreement between the corporate and the generator. If the market price rises above the agreed strike price, the generator will pay the customer and if the market price drops below the agreed strike price, the corporate will pay the difference to the generator. The payments are typically based on a predetermined quantity of electricity as specified in the contract, although they can be based on the actual energy used by the corporate which gives the corporate flexibility for its future business model. This concept is similar to the existing UK government s Contracts for Difference scheme (CfD), ensuring that projects have a secure long-term revenue stream. Among the benefits of this PPA is that it allows the corporate to focus on key issues such as strike price and the transfer of RE certification, whilst all the technical, regulatory and project details are dealt with by the utility and the generator. This PPA represents a flexible method of purchasing a long-term energy supply as it is scalable, different generators can be contracted should energy requirements increase in the future. COPYRIGHT JONES LANG LASALLE IP, INC. 2018. All Rights Reserved 3
Synthetic PPA: Collar mechanism A collar option PPA operates in a very similar fashion to the Price Guarantee Arrangement Synthetic PPA, where both the generator and corporate share some exposure to wholesale price but are protected from extremes. As a hybrid version of a put/call mechanism, this PPA has two option contracts which effectively create a profit cap and a floor for losses, hence the collar. A predefined margin around the agreed strike price is determined in the contract (usually fixed to inflation). When wholesale electricity prices fall below the strike price, the corporate will top up the payments up to the strike price, but there is a limit imposed on the maximum top up payment that will be made. This also true in reverse, with the generator reimbursing the corporate when the wholesale price goes above the strike price, to the value of the predefined upper limit minus the strike price. This method provides a greater deal of financial security for both parties. The benefit of a collar mechanism is that the floor can be priced to repay debt whilst allowing equity to benefit from some upside in power prices. Examples Q4 2017 saw a flurry of activity for corporate PPAs with several high profile transactions taking place. The largest corporate PPA for wind energy was signed for a Swedish wind farm, the 650MW Makbygden ETT. A 19-year fixed volume PPA was signed by a subsidiary of Nordsk Hydro. Other deals completed include the telecommunications firm EE purchasing 680GWh for 500 UK stores, and Google have purchased the full 200MW output of EDFs Glacier Edge wind farm in the USA. COPYRIGHT JONES LANG LASALLE IP, INC. 2018. All Rights Reserved 4
/MWh Outlined below is a worked example of the potential savings that a large corporate could make through a 15 year PPA. A high energy using large corporate has a demand of 200 GWh/a and is looking to ensure a secure clean energy supply for a 15 year period. Over the period 2020 2034 the wholesale electricity price is projected to average 54/MWh (JLL in house price forecast real terms) Wholesale prices account for approximately 40% of end user power prices, with the remaining 60% accounting for network, supplier and climate policy costs. The corporate signs a 15-year fixed price synthetic PPA Price Guarantee Arrangement at 50/MWh. The price guarantee arrangement is signed between the corporate and the generator. A conventional PPA is signed between the utility and the generator upon similar terms to those customarily used for renewable energy projects. A supply agreement is put in place between the corporate and the utility to provide secure supply. The corporate will top up the payments to the generator if the market price of energy drops below the strike price. If the market price of energy rises above the strike price, the generator will reimburse the corporate. The corporate has the right to sell on its unused electricity to the utility, and it also agrees to buy any surplus energy it requires if it exceeds the volume specified in the PPA as the utility typically takes the imbalance risk because renewable generators are not typically able to take this risk. This will result in c. 11 million in cost savings over the 15-year period as well as secure finance for generators. 180 160 140 120 100 80 60 40 20 0 Power Price Projections 162/MWh 148/MWh 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Wholesale Prices Network/Supplier/Climate Policy Costs End User Price With PPA Fixed Wholesale 50 COPYRIGHT JONES LANG LASALLE IP, INC. 2018. All Rights Reserved 5
Summary PPAs are becoming an increasingly attractive proposition for corporates; they offer a secure long term supply of clean energy, cost certainty in uncertain times, and the opportunity to avoid greenwash by adding new renewable generation to the grid. With the cost of fossil fuels rising and renewable energy increasingly becoming the cheaper option, corporate PPAs are growing increasingly popular, with a wave of large deals closing in Q4 2017. This report looks at three different structures of corporate PPAs; direct, synthetic price guarantee arrangements and synthetic collar option. There are benefits and drawbacks to each of these with direct PPAs allowing a great deal of input into project details whilst also incurring complex risk allocation, synthetic PPAs are a more streamlined hands off approach but have different pricing structures to that of a typical power purchase agreement. Price guarantee arrangements are effectively private CfDs which have proven to be a successful method for ensuring secure revenue streams for renewable energy projects. We describe a worked example whereby a company with a hypothetical demand of 200 GWh/a could save around c. 11 million on its electricity costs over a 15-year period. The obstacles to these savings are that corporates need to appreciate the likely rises in wholesale electricity costs and overcome internal corporate inertia to realise real long-term environmental benefits. JLL Services JLL s energy teams specialise in renewable energy M&A, valuations, and advisory services for a variety of technologies. We have advised several high profile clients on Corporate PPAs and are well placed within the sector to consult on future agreements. As a global company with over 77,000 employees in 80 countries, JLL offers an unparalleled breadth of service covering corporate solutions, sustainability services, property management and energy advisory. Our clients include developers, generators, investors, utilities, and corporates, providing us with a wealth of connections with which to advise and consult with in this area. For more information, please see the contacts below COPYRIGHT JONES LANG LASALLE IP, INC. 2018. All Rights Reserved 6
Contact Dominic Szanto Director - Energy and Infrastructure Advisory +44 (0) 20 7087 5262 dominic.szanto@eu.jll.com David Whitehead Analyst Energy and Infrastructure Advisory +44 (0) 20 7852 4610 david.whitehead@eu.jll.com COPYRIGHT JONES LANG LASALLE IP, INC. 2018. All Rights Reserved 7