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A new, five-year power purchase agreement between Anglo-Dutch oil company Shell and a UK solar farm is an example of a corporate sector purchase of renewable power, but there is a long way to go before such agreements replace government-backed auctions in Europe, and kick-start a new source of funding for renewables projects.
Royal Dutch Shell earlier this month agreed a five-year supply deal for power generated from Britain’s second-largest solar power plant, owned by British Solar Renewables (BSR).
Corporate purchases of electricity from wind and solar projects may become much more important in Europe, given evidence in some countries of a pullback in government support for equivalent, publicly funded power purchase agreements (PPAs).
Such government tenders work by auctioning a certain capacity of wind or solar power, inviting developers to bid a certain price for their electricity, under long-term PPAs, with the lowest prices winning.
The UK government defines the difference between the contracted power purchase price and the wholesale power price as a levy on consumers, which it now wants to minimise.
But these government-backed auctions have proved popular with big institutional investors, including pension funds, by offering reliable, long-term cashflows, and so have successfully driven down costs compared with previous subsidy schemes.
As IEEFA described in our recent renewables infrastructure report, long-term government PPAs have attracted low-cost pension fund capital, because pension funds are in a hunt for reliable cashflows in an era of record-low interest rates, and government-backed PPAs have similar characteristics to government bonds.
Given the continuing shift away from government support for renewables, could corporates step in, and continue to attract institutional investors to these types of project? That will depend on corporate PPAs offering investors the same level of security: the lower the off-take price, the shorter the contract, and the less credit-worthy the off-taker, the less likely investors will want to support renewables projects.
To date, the United States has been the centre of the global corporate PPA market, with large companies such as Apple and Google eager to burnish their green credentials, and to benefit from the falling cost of renewables.
For example, in 2017, Apple signed a 200MW PPA with NV Energy to purchase electricity from the Techren Solar project, the largest agreement ever signed in the U.S. between a corporation and a utility, according to Bloomberg New Energy Finance (BNEF).
BNEF reported last week that the United States dominated the global corporate PPA markets in 2017, contracting some 3.1 gigawatts (GW) of capacity, with Europe trailing third behind the Asia-Pacific region. Of Europe’s 1.1 GW, some 95% came from projects in the Netherlands, Norway and Sweden, BNEF said.
So the question remains whether Europe can step up. Britain is an obvious candidate market, given signs that the UK government no longer has an appetite for public PPAs. And the recent Shell contract is a sign of the way to go.
But the scale of new, unbuilt projects requiring offtake contracts in Britain is huge. In our recent pension fund report, IEEFA calculated that some 25 GW of unbuilt wind and solar capacity in the UK had planning permission, the vast majority of which still required financing.