Author: Rositsa Chopeva, Partner, xFigureFinance
2021 was a record year for corporate power purchase agreements, with 31.1 GW of clean energy bought by corporations worldwide, out of which 8.7 GW for deals announced in Europe (source: BloombergNEF). Although Spain and the Nordics are the most developed European PPA markets, we are expecting to see this trend in the Balkans region and the first deals in Bulgaria and Romania give true confirmation for this.
Axpo signed a corporate power purchase agreement (PPA) in February with Austrian energy company Verbund and a multinational automotive supplier for its production plants in Romania. Under the agreement, the plants in Romania will be supplied with 70 GWh a year from Verbund’s 226 MW wind farm in Casimcea, near the Romanian Black Sea coast.
In March 2022, telecommunication service provider A1 Bulgaria and domestic clean energy investment group Renalfa signed a ten-year PPA for solar energy. The 20 GWh of energy will be supplied by a photovoltaic plant in south Bulgaria and this is officially the first signed corporate PPA in Bulgaria.
These recent developments in combination with the increase in volatility of wholesale electricity prices have paved the way for wider adoption of corporate PPAs. And the rise in popularity of corporate PPAs will in turn provide more confidence to investors that plan to develop large-scale renewable projects. In fact, such long-term bilateral agreements where the energy producer agrees to sell, and the consumer agrees to buy at a fixed price creates certain benefits for both sides.
Corporate PPAs can be attractive for both parties
PPAs benefit the renewable energy developer as they:
- Represent a stable and predictable cashflow source (when the buyer is credible), which makes the project less risky and more attractive for financial institutions. Furthermore, predictable revenue and cost structure can persuade banks to provide more leverage for the project which in turn improves equity returns.
- Provide more certainty in expected returns (given high degree of certainty in the cost structure) and attract informed investors with suitable risk-return profiles
PPAs benefit the buyer as they:
- Offer stability in the electricity price over the duration of the contract, making budgeting easier, especially for companies where energy bills are of critical importance to the bottom line.
- Help reduce scope 2 emissions (from energy consumed) and therefore aid the buyer in achieving its announced climate targets.
- Convey a credible message to different stakeholders that the company is taking measures to comply with contemporary ESG standards. The benefits of such a message can be numerous – from conscious consumer acquisition to improving investor relations.
What is the relevance of these recent developments to companies in our region?
When you look at a major company’s climate report, you might notice that their scope 3 emissions (which for some companies are by far the biggest source) are linked to virtually any economic activity of the company that doesn’t involve direct production or energy consumption – from services the company uses to parts/components it needs to produce its goods and even its inventory of office supplies.
As you might have guessed, some, if not most of the services and goods listed under a large corporate’s scope 3 emission activities come from local SMEs. For this reason, the pressure on smaller producers/service providers to comply with their buyer’s ESG standards is expected to significantly increase in the coming years. Given the circumstances, PPAs can be a great tool for smaller companies to show commitment to a more sustainable way of doing business.
Additionally, producing goods and services using clean energy can be a great differentiator for an SME and attract big clients that place special emphasis on ESG efforts. Finally, as mentioned before, corporate PPAs can shield smaller businesses that do not have large cash reserves from energy price shocks, such as those we have experienced recently.