CPPAs are a regulatory failure: ‘big tech’ is the only beneficiary

Amazon and other 'big tech' firms benefit from CPPAs at the expense of the public

This was originally published by Windpower Monthly who have kindly authorized me to crosspost this here.

'Big Tech' companies such as Google are the main beneficiaries of CPPAs, argues Jérôme Guillet (pic credit: Getty)

Corporate power purchase agreements (CPPAs), in which the power price is fixed or subject to caps or floors, are increasingly seen as the panacea for renewable energy projects.

They make it possible to develop projects even in the absence of regulated tariffs, i.e. in a “merchant” context, by partially shielding them from the price risk. As such, they are appreciated by governments, which can then claim they have eliminated all “subsidies” for renewable energy.

The reason projects enter into PPAs is that it is a requirement to attract funding on attractive enough terms to make the initial investment possible.

Merchant risk is seen as severe and only providers of expensive capital are willing to take it. Debt providers cannot bear the volatility of power prices and will only lend if the price risk is hedged – although financial hedges are only readily available for short maturities of up to five years – or against very low price assumptions.

In the latter case, the debt amount is much lower and larger equity volumes are required to build the project.

Similarly, equity providers will ask for higher rates of return unless the price risk is hedged.

As capital–intensive projects, the cost of electricity from renewables is heavily driven by the cost of capital. Projects with smaller volumes of cheap debt and a requirement for more expensive equity are less competitive than those that have access to a risk–mitigation mechanism, and are less likely to get built.

CPPAs are the only mechanism available to transfer the price risk to the buyer over long periods in the absence of regulated long-term tariffs.

Buyers will typically be parties that have long-term power needs and who therefore need to protect themselves from price volatility.

Large power consumers include metal producers and other heavy industry, railways and, increasingly, data center operators. It may also include companies that are looking to become carbon–neutral and get “green” inputs for their industrial processes.

All these buyers have one thing in common: they want to buy power on commercial terms. The contracts must deliver a price which is no less favorable than they can get from the grid or short-term power derivative markets.

The only game in town

In the absence of a regulated tariff mechanism, corporate buyers are the only game in town for renewable projects. They will be looking for the lowest price and have the buying power to drive prices well below spot prices are, even when those are low. A fixed price, however low, will attract cheap capital and is therefore still a better option than a fully merchant project that requires higher returns and cannot attract enough funding to get built. So renewable energy projects will offer very competitive prices to get a good, long-term fixed price CPPA.

The alternatives

But they would be willing to offer the same price levels, or better, for contract for differences (CfDs) with a public or regulated counterparty. The payment risk on such an entity is lower which means that the benefit of a long-term fixed price supply of electricity goes to the buyers and not to the wider public that is the de facto ultimate counterparty under a CfD.

This may seem irrelevant when power prices are low but during periods like now when they are high, the benefit of the fixed price protection goes exclusively to the buyer under the CPPA.

The absence of a public CfD mechanism – made competitive by auctions or tenders – means projects need to seek fixed prices elsewhere to get projects built. Given the scarcity of buyers, they must grant them extremely favorable prices which has the effect of transferring a large part of the value of the projects, by default.

This also means the public does not get the benefit of having a part of their supply at long-term fixed prices.

The beneficiaries of CPPAs

When you look at the main counterparties of CPPAs, you see a list dominated by ‘Big Tech’, e.g. Microsoft, Google, Facebook and Amazon. Today, the are the ones which benefit from cheap electricity at a time of high gas and power prices - when the beneficiary could have been the general public, via CfDs.

Source: https://nationworldnews.com/corporate-renewable-ppas-hit-record-highs-in-2021-but-not-in-australia/

The refusal by governments to put CfDs in place means that renewable energy is, de facto, subsidising Big Tech instead of contributing to lower and less volatile power prices for everybody.

This cannot be considered smart policy.

The wind industry should make the case for two–way CfDs more forcefully and insist on the value of delivering home grown, stable price power over the very long term.

This is seen as one of the key advantages of nuclear, so it should be even more so for cheaper renewables.

Some countries, such as Germany and the Netherlands, have had CfDs that act as floors only. Such asymmetrical CfDs should be avoided at all costs, from a public policy perspective, as they fail to keep the benefit of stable prices for ratepayers. They fulfil the goal of providing protection against low prices to projects, but do so in a highly inefficient way

Maybe the current energy crisis, driven – as it is so often - by external geopolitical events, will help make this more obvious.