Cross-Border Renewable Ppas in Europe: an Overview for Corporate Buyers December 2020 Contents

Cross-border renewable PPAs in Europe: An overview for corporate buyers December 2020 Contents

List of acronyms | 3

Executive summary | 4

1 Introduction | 8

2 XB PPA drivers and benefits | 11

3 Differences between virtual and physical XB PPA models | 14

4 Risk considerations specific to XB PPAs | 19

5 GO treatment and affiliated renewable electricity

procurement claims | 27

6 Internal and external communications for XB PPAs | 31

7 Conclusion | 34

Annex: Process of power trading on interconnectors in Europe | 36

Cross-border renewable PPAs in Europe: An overview for corporate buyers 2 List of acronyms

AIB Association of Issuing Bodies

CDP Carbon Disclosure Project

EAC energy attribute certificate

EECS European Energy Certification System

EU ETS European Union Emissions Trading Scheme

FTR financial transmission right

GHG greenhouse gas

GO guarantee of origin

IFRS International Financial Reporting Standards

LCOE levelized cost of electricity

NGO non-governmental organization

PPA power purchase agreement

PTR physical transmission right

RED Renewable Energy Directive

SDAC single day-ahead coupling

TSO transmission system operator

WBCSD World Business Council for Sustainable Development

XB PPA cross-border power purchase agreement

Cross-border renewable PPAs in Europe: An overview for corporate buyers 3 Executive summary

Cross-border renewable PPAs in Europe: An overview for corporate buyers 4 Executive summary

Interest in corporate renewable This report examines a specific The objective of this report is to power purchase agreements offsite PPA structure emerging in help corporate buyers understand (PPAs) has grown exponentially the European Single Market: the the technicalities of XB PPAs by corporate cross-border PPA (XB PPA). In a XB providing a balanced view of the renewablein recent years. PPA A is a contract PPA, a corporate buyer purchases risks and opportunities that the XB between the corporate buyer(s) renewable electricity (and usually PPA structure can provide. and the power producer the accompanying guarantees of (developer, independent power origin – GOs) generated outside the This report only addresses XB 2 producer, investor) to purchase electricity market of their electricity PPAs. Previous WBCSD reports renewable electricity at a pre- load, via a PPA. XB PPAs can take detail the structures, benefits and agreed price for a pre-agreed two forms: virtual/financial XB PPAs, risks that are applicable to non- period of time.1 which are growing in popularity for XB PPAs (in-market PPAs) such pan-European renewable electricity as Corporate Renewable Power sourcing, and physical/direct XB Purchase Agreements: Scaling up PPAs, of which there are currently no globally and Innovation in Power known examples in Europe using the Purchase Agreement Structures, definition described in this report. as does the RE-Source report on Risk Mitigation for Corporate Renewable PPAs.

1 For more information, please see previous WBCSD reports on corporate renewable PPAs: Corporate Renewable Power Purchase Agreements: Scaling up globally (October 2016), Innovation in Power Purchase Agreement Structures (March 2018) and How Multi-Technology PPA Structures Could Help Companies Reduce Risk (March 2019). These publications cover opportunities offered by corporate renewable PPAs, obstacles faced by corporate buyers and developers, and innovations in corporate renewable PPAs that are emerging as the market grows and evolves. 2 Companies procure electricity at the country or electricity market (e.g. zonal) level, depending on their location. Throughout this report we use the term “market” for consistency.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 5 In the virtual XB PPA model, the (market B). As the virtual XB PPA to the corporate buyer’s point of power producer sells the generated contract is a financial settlement, consumption via the electricity electricity in the wholesale power a physical network connection network and interconnector. As market where the generation asset between the generation asset(s) physical XB PPAs by this definition is located (market A). The payments and the load is not necessary. rely on electricity trading across received by the power producer market borders on so-called from the fluctuating wholesale In the physical XB PPA model, interconnectors, it is important power price in market A are net- there is a physical network to understand this process to be settled3 against the PPA price connection between the generation able to evaluate its practicality for a agreed with the corporate buyer. asset in market A and the load physical XB PPA and to understand The corporate buyer continues to of the corporate buyer in market why the physical XB PPA structure purchase electricity for its facilities B. The generated electricity is – using the definition in this report – under its local contracts in the nominated with the system and/ presents considerable uncertainty market where the load is located or market operator for delivery and risk.

Figure 1: Virtual cross-border PPA MARKET A MARKET MARKET B BORDER 2 4

Renewable Retail electricity electricity 3 4

Wholesale ELECTRICITY ELECTRICITY Retail OFFSITE electricity GRID GRID electricity CORPORATE RENEWABLE price payment FACILITY ENERGY PROJECT Virtual PPA settlement (wholesale electricity 1 price net-settled agreed PPA price) Guarantees of origin

1 Corporate buyer and power 2 Project delivers renewable 3 Power producer receives wholesale producer agree upon net-settled electricity to grid in market A electricity price virtual PPA price and corporate buyer receives GOs 4 Corporate buyer continues its retail electricity contract with retail provider in market B

Note on step 1: basis risk may either be allocated to the corporate buyer (if the PPA price is net-settled against the wholesale electricity price in the market where the generation asset is located, market A) or to the power producer (if the PPA price is net-settled against the wholesale electricity price in the market where the load is located, market B). We include more detail on the definition and allocation of basis risk in ‘Risk considerations specific to XB PPAs‘.

Figure 2: Physical cross-border PPA MARKET A MARKET MARKET B BORDER

TRANSMISSION 4 LINES 2 3 3 Renewable electricity Renewable Renewable Renewable 5 electricity electricity electricity ELECTRICITY ELECTRICITY Additional retail OFFSITE GRID GRID electricity CORPORATE RENEWABLE and payment FACILITY ENERGY 1 PROJECT Agreed PPA price Guarantees of origin

1 Corporate buyer pays power 2 Renewable electricity 3 Capacity rights secured on producer the agreed PPA price delivered to grid in market A interconnectors for renewable electricity and receives GOs 4 Renewable electricity 5 Corporate buyer receives and pays for delivered to corporate facilities additional electricity via local retail in market B provider or a contracted third-party

3 We use the term net-settled to clarify that each party in the agreement is subject to gains or losses depending on the outcome of the difference between the wholesale power price and the agreed upon PPA price.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 6 XB PPAs may provide corporate However, XB PPA sourcing and • Corporate buyers must buyers with additional benefits contracting can be complex and it adhere to market boundary compared to in-market PPAs, is important that corporate buyers guidance issued by reporting including the ability to: fully understand the risks and bodies, in order to make complexities before entering into a credible environmental claims • Overcome regulatory barriers contract of this type, including but associated with a XB PPA. in and between the markets not limited to: where their facilities are located • There is an increased need • Virtual XB PPAs are susceptible for a thorough and robust due • Choose projects with the most to increased basis risk and can diligence process due to added favorable terms irrespective trigger derivative accounting sourcing and contracting of their location and/or use a under International Financial complexity. multi-technology approach in Reporting Standards (IFRS) multiple geographies where accounting treatment. Despite the complexities, as beneficial; and renewable electricity markets • Physical XB PPAs with cross- in Europe continue to grow and • Aggregate electricity load in border electricity trading mature, more and more companies several markets and streamline (as defined in this report) may favor the XB PPA model for its electricity and GO sourcing. are significantly hindered by upsides. With a supportive enabling the uncertainty of obtaining environment, XB PPAs have interconnector capacity rights the potential to make a material for the duration of the PPA and contribution to additional renewable by the accompanying cross- electricity deployment in Europe. border transmission price risk.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 7 1 Introduction

Cross-border renewable PPAs in Europe: An overview for corporate buyers 8 1 Introduction

Interest in corporate This report examines a specific The reasons for growing interest renewable power purchase offsite PPA structure emerging in in XB PPAs are manifold. XB agreements (PPAs) has grown the European Single Market: the PPAs can offer greater flexibility exponentially in recent years. cross-border PPA (XB PPA). In a XB to the corporate buyer, who can Corporate renewable PPAs PPA, a corporate buyer purchases choose the most favorable project enable corporate buyers renewable electricity (and usually conditions unrestricted by location. to manage their electricity the accompanying GOs) generated In addition, XB PPAs are growing 6 costs and increase cost outside the electricity market of in familiarity and legitimacy in visibility, while simultaneously their electricity load, via a PPA. XB Europe as European electricity making progress on carbon PPAs can take two forms: virtual/ markets are becoming ever more reduction and environmental financial XB PPAs, which are growing interconnected – physically and 7 goals. Cross-border PPAs in popularity for pan-European commercially – and Europe is are the latest structural renewable electricity sourcing, considered a single market for variation to emerge and and physical/direct XB PPAs, of carbon emissions under the are fast gaining popularity which there are currently no known European Union Emissions Trading among corporate buyers examples in Europe – using the Scheme (EU ETS). looking to source renewable definition described in this report. power across Europe. A corporate renewable PPA is a contract between the corporate buyer(s) and the power producer (developer, independent power producer, investor) to purchase renewable electricity at a pre-agreed price for a pre-agreed period of time.4 The contract contains the commercial terms of the electricity sale: contract length, point of delivery, delivery date/times, volume, price and product. The electricity sold under a PPA can be from an existing renewable electricity supply or a new-build project. A PPA typically also includes the sale of the associated energy attribute certificates (EACs), commonly known as guarantees of origin (GOs) in the European Single Market5.

4 For more information, please see previous WBCSD reports on corporate renewable PPAs: Corporate Renewable Power Purchase Agreements: Scaling up globally (October 2016), Innovation in Power Purchase Agreement Structures (March 2018) and How Multi- Technology PPA Structures Could Help Companies Reduce Risk (March 2019). These publications cover opportunities offered by corporate renewable PPAs, obstacles faced by corporate buyers and developers, and innovations in corporate renewable PPAs that are emerging as the market grows and evolves. 5 Throughout the report, we refer to European energy attribute certificates as GOs. GOs are defined in EU legislation (article 15 of the European Directive 2009/28/EC) and applied in the European Single Market (EU Member States plus the European Economic Area states of Iceland, Lichtenstein and Norway). 6 Companies procure electricity at the country or electricity market (e.g. zonal) level, depending on their location. Throughout this report we use the term “market” for consistency. 7 19 European countries are currently part of the Multi-Regional Coupling (MRC) and the European Union plans to continue to add markets to eventually create a single pan-European electricity market.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 9 There is also increasing interest in XB However, XB PPAs also require implications of market boundary PPA structures at the government careful consideration as they definitions for GO treatment and level: a 2019 publication by the inherently introduce new risks into disclosure, and the fifth chapter European Commission on the the PPA compared to in-market PPA concludes the report with guidance competitiveness of corporate structures. The objective of this on effective internal and external sourcing of renewable energy report is to help corporate buyers communications for XB PPAs in explicitly called XB PPAs “important understand the technicalities of XB Europe. element[s] for expanding the PPAs by providing a balanced view contribution of corporate renewable of the risks and opportunities that This report only addresses XB energy PPAs to Europe’s energy the XB PPA structure can provide. PPAs. Previous WBCSD reports transition…allow[ing] renewable detail the structures, benefits and energy to be purchased from The first and second chapters of risks that are applicable to non- where it is cheapest and delivered this report examine the drivers XB PPAs (in-market PPAs) such to centres of consumption.” This behind XB PPAs and the differences as Corporate Renewable Power reasoning points to additional between virtual and physical XB Purchase Agreements: Scaling up system efficiencies, as XB PPAs PPA models. The third chapter globally and Innovation in Power can enable renewable electricity addresses risk considerations Purchase Agreement Structures, as generation in locations in Europe specific to XB PPAs, delving into does the RE-Source report on Risk where it is possible to produce it the details of the importance of Mitigation for Corporate Renewable most efficiently, meaning in markets understanding the impact of basis PPAs. where the load factors for renewable risk on the economics of virtual technologies such as solar or wind XB PPAs, and why cross-border are highest. As experience develops trading rules have been prohibitive and markets mature, XB PPAs may for physical XB PPA structures be applicable in other geographies in Europe to date. The fourth too, such as Asia. chapter considers the important

Cross-border renewable PPAs in Europe: An overview for corporate buyers 10 2 XB PPA drivers and benefits

Cross-border renewable PPAs in Europe: An overview for corporate buyers 11 2 XB PPA drivers and benefits

The main drivers for corporate XB PPAs offer geographical 3. The corporate buyer can buyers to procure electricity flexibility to the corporate buyer, extract a higher value (such as via renewable PPAs are irrespective of the location of their lower cost, lower risk or higher economics, sustainability, load(s), when: environmental impact) by brand reputation and procuring renewable electricity leadership (for more details, 1. Corporate renewable PPAs in a different market. see WBCSD’s Corporate are not available in the market Renewable Power Purchase where the load is located due to Table 1 describes the specific Agreements: Scaling up the regulatory framework; benefits of XB PPAs, beyond the globally report). The XB PPA benefits already offered by in- 2. Corporate renewable PPAs are market PPAs. structure can offer the added available in the market where advantage of contracting the load is located but are a project with the most cost prohibitive or otherwise beneficial economics – constrained; or regardless of geography.

“Maximizing impact was our key driver for selecting a cross-border structure – it allows us to contribute to the build-out of new solar power plants by aggregating demand from many countries under a single PPA.” Moritz Bernhoerster, Director Global Procurement, AB InBev

“By choosing a virtual cross-border PPA structure, we were able to combine our electricity load across several markets and contribute to the development of additional solar and wind capacity, which we wouldn’t have been able to do in individual countries” Sim van der Linde, Project Director Renewable Energy, Royal DSM

Cross-border renewable PPAs in Europe: An overview for corporate buyers 12 Table 1: Potential benefits of XB PPAs for corporate buyers

Potential benefit Description

Ability to bypass regulatory Corporate buyers can source renewable electricity for their facilities barriers in the market where the even if the regulatory framework in their local market is prohibitive. load is located

Ability to choose projects with Corporate buyers can source renewable electricity from projects in the most favorable terms locations with the most beneficial terms. These can relate to price, as a higher spread between the wholesale electricity price and levelized cost of electricity (LCOE) may enable the corporate buyer to negotiate a proportionally lower PPA price than in their load market.* For example, projects with high load factors (i.e., steady wind speeds or high solar radiation resulting in a high electricity production), low labor costs and low material costs allow for electricity production at the lowest unit cost, giving a low LCOE for the project. This has the added system benefit of encouraging the development of renewables in the locations best suited to those technologies. Favorable terms may also relate to risk management, e.g., when the corporate buyer is looking for a certain price structure that improves the ability to manage for or hedge against risks.

Ability to use a multi-technology Corporate buyers can source renewable electricity from multiple approach locations, using the most efficient technology for the conditions in each location, i.e. a solar project in one market and a wind project in another market, to form a firmer electricity generation profile that better matches the corporate buyer’s electricity demand profile.8

Ability to aggregate electricity Corporate buyers can combine their electricity load from multiple load from several markets and markets under the umbrella of one or more XB PPA(s). This allows streamline electricity and GO corporate buyers to execute large-scale pan-European procurement of sourcing renewable electricity and GOs, which it can apply across its operational footprint. By aggregating the procurement of power and GOs from several markets into one or more XB PPAs, it is possible to reduce the number of overlapping contracts for electricity purchasing and associated fees. Aggregating electricity load may also have the added benefit of expediting the construction of new renewable electricity projects, e.g. when the corporate buyer faces planning bottlenecks in the market where the load is located.

Ability to supply leased facilities When using a virtual XB PPA model, the PPA can cover the total load of with renewable electricity a corporate buyer’s facilities, including those owned or leased, and the corporate buyer may be able to change the location of this load without renegotiating contracts.

Improved leadership opportunity XB PPAs provide the flexibility to seek projects that can derive the most positive environmental impact – if desired – such as those located in more carbon-intensive electricity markets. These types of leadership actions may align with company objectives and may positively impact a company’s brand and reputation.

* NB: For a virtual XB PPA structure, it is necessary to weigh the economic upside against the additional cost of managing basis risk (see ‘Implications of basis risk for virtual XB PPAs’). For a physical XB PPA structure, the costs and risks of transmitting power between the markets may negate the economic upside (see ‘Implications of cross-border power transmission for physical XB PPAs’). The next chapter provides further explanation on the differences between virtual and physical XB PPA structures.

8 For further analysis of multi-technology PPAs and their impact on shape, volume and imbalance risk, see the WBCSD report How multi- technology PPAs could help companies reduce risk (March 2019)

Cross-border renewable PPAs in Europe: An overview for corporate buyers 13 3 Differences between virtual and physical XB PPA models

Cross-border renewable PPAs in Europe: An overview for corporate buyers 14 3 Differences between virtual and physical XB PPA models

Generally, XB PPAs can be • In the physical PPA model, there Both virtual and physical PPA is a physical network connection structures can offer “additionality”, structured eithervirtual as a virtual PPA or financial PPA ( ) between the generation asset where the renewable electricity and the load of the corporate would not have been produced or as physicala direct or PPA physical PPA ( ). Before buyer. The generated electricity but for the corporate renewable 10 evaluating these two XB is nominated with the system PPA. European companies may be PPA models, here is a short and/or market operator to be most familiar with the physical PPA reminder of in-market virtual delivered to the corporate model, since many are accustomed and physical PPAs: buyer’s point of consumption to purchasing electricity under a via the electricity network. This physical PPA structure, while U.S. • In the virtual PPA model, the allows for direct delivery of power or Australia-based companies power producer sells the from the power producer to the with European loads may be more generated electricity into corporate buyer. The corporate familiar with the virtual PPA model, the wholesale power market. buyer usually purchases any as this is commonly used in the U.S. The payments received by additional power needed to and Australia. the power producer from the serve the remainder of the load fluctuating wholesale power We explain the differences between 9 via its existing retail electricity price are net-settled against provider or a third-party. a cross-border virtual PPA and the PPA price agreed with the cross-border physical PPA in the corporate buyer. The corporate For both structures, the power following two subsections. buyer continues to purchase producer typically sells the electricity for its facilities associated GOs alongside the under its local contracts. As PPA to enable corporate buyers to the virtual PPA contract is a evidence that each MWh that they financial settlement, a physical have purchased through the project network connection between is renewable. the generation asset(s) and the load is not necessary.

9 We use the term net-settled to clarify that each party in the agreement is subject to gains or losses depending on the outcome of the difference between the wholesale power price and the agreed upon PPA price. 10 For more information on additionality, see WBCSD report Corporate Renewable Power Purchase Agreements: Scaling up globally

Cross-border renewable PPAs in Europe: An overview for corporate buyers 15 Virtual XB PPAs the corporate buyer’s facility. The as previously detailed in the IFRS Virtual PPAs are structurally upside is that the corporate buyer accounting outline for Power accommodating to the XB PPA does not need to alter existing retail Purchase Agreements report. model. This is because the virtual electricity contracts in the market We provide further commentary PPA separates two prices by design: where the load is located. However, on these two aspects in ‘Risk (1) the wholesale electricity price virtual XB PPAs are susceptible to considerations specific to XB PPAs’. against which the agreed PPA increased basis risk and virtual PPAs can trigger derivative accounting Figure 1 below shows a typical virtual price is net-settled; and (2) the XB PPA structure. existing retail electricity contract at under IFRS accounting treatment

Figure 1: Virtual cross-border PPA

MARKET A MARKET MARKET B BORDER 2 4

Renewable Retail electricity electricity 3 4

Cross-border renewable PPAs in Europe: An overview for corporate buyers 16 Case study: Novartis, the global medicines Choosing a virtual cross-border Virtual cross-border PPA company, has set ambitious PPA structure was the result of helps Novartis become sustainability targets to a trade-off analysis between both energy and climate- be carbon neutral in its sourcing and contracting resilient own operations by 2025 in complexity versus flexibility and accordance with the Science- carbon impact. One of the key Based Targets Initiative criteria. considerations in the Novartis Structure: Virtual cross-border As part of this effort, in November renewable energy strategy was its PPA 2020, Novartis announced a set fluid European footprint which is Generation market: Spain of virtual cross-border PPAs for comprised of numerous locations Offtake markets: Austria, more than 275 MW of renewable with different energy needs. The Germany, Spain, France, power. With these deals, Novartis virtual cross-border PPA not only United Kingdom, Italy, Sweden, is on track to achieve 100% allows the aggregation of demand Romania, Switzerland, Belgium, renewable electricity in its from multiple countries but also Slovenia, Poland, Czech European operations. provides flexibility in the event of Republic, Ireland any changes in the size or location One of the virtual cross-border Power producer: Enel Green of the company’s facilities. PPAs was signed with Enel Power Green Power, with support from By procuring electricity from the Capacity: 78.5 MW Schneider Electric, through a Spanish wind project, Novartis Technology: Wind 78.5 MW portion of the Tico is leveraging one of the highest Tenor: 10 years wind farm in Spain. This 10-year onshore wind load factors in deal will generate guarantees of Europe. This is in turn reflected origin (GOs) for Novartis and the in the lower levelized cost of associated claims will be applied energy and more cost-effective on a pan-European basis. renewable electricity production.

Key learnings: “This portfolio of virtual PPA deals that we have recently announced has allowed us to make significant progress towards our carbon neutrality goals during a period of significant business transformation activity. The flexibility offered by utilizing the virtual cross-border PPA structure was integral in defining our renewable energy strategy. The other important factor in the decision-making process was the GO treatment. The clear definition of a market boundary in Europe allows Novartis to make evidenced carbon reduction claims from renewable electricity procured through this virtual cross-border PPA.” Mark Scoffin, Head of Procurement – Utilities, Novartis

Cross-border renewable PPAs in Europe: An overview for corporate buyers 17 Physical XB PPAs of physical transmission rights The rules of trading power on It is also theoretically possible to (PTRs) and financial transmission interconnectors create two main structure XB PPAs as a physical rights (FTRs) in Europe, can find risks for physical XB PPAs, firstly PPA. In general, physical PPAs an explanation in the Annex: obtaining interconnector capacity are attractive for corporate Process of power trading on rights for the duration of the XB PPA buyers because they do not interconnectors in Europe. and secondly managing the price create derivative accounting risk that arises from the auctioning 11 When using an interconnector to of interconnector capacity rights concerns under IFRS and physically flow electricity from one allow for the delivery of power and from the price spread between market to another for a physical all markets concerned. Another via the system/market operator XB PPA, complexities arise from a to the load location(s). Figure relevant issue is the small number of mismatch between the purpose of true pan-European energy suppliers 2 below shows a theoretical the existing rules of cross-border physical XB PPA structure. that would manage the delivery of power trading on interconnectors electricity across borders to the As physical XB PPAs by this and long-term PPAs: interconnector corporate buyer’s various facilities. definition rely on electricity trading capacity rights (i.e. PTRs and FTRs) We provide more explanation on across market borders on so-called are predominantly used as financial these risks in ‘Implications of cross- interconnectors, it is important contracts to enable efficient trading border power transmission for to understand this process to be of power over the interconnector physical XB PPAs’. able to evaluate its practicality for and are not designed for the a physical XB PPA. Readers who purpose of physically delivering are not familiar with cross-border power for an individual long-term electricity trading and the use PPA aiming for price visibility.

Figure 2: Physical cross-border PPA

MARKET A MARKET B MARKET BORDER

4 Renewable electricity 5 Corporate buyer receives and pays for delivered to corporate facilities additional electricity via local retail in market B provider or a contracted third-party

11 Unless hedging mechanisms are deployed to manage certain risks. See further information under ‘Accounting Implications’ in ‘Sourcing and contracting complexity’.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 18 4 Risk considerations specific to XB PPAs

Cross-border renewable PPAs in Europe: An overview for corporate buyers 19 4 Risk considerations specific to XB PPAs

The drivers and potential Market and policy- However, for both XB and in-market benefits of XB PPAs outlined related risks PPAs, it is always necessary to evaluate all risks for each company, at the start of this report show While it is necessary to choose counterparty, third-parties, lenders the significant upsides a XB and structure PPAs in a manner and markets concerned. For a PPA can offer. However, XB that provides economic and definition of all risks associated with PPAs equally carry specific environmental upsides to both corporate renewable PPAs, refer risks that corporate buyers parties, all parties should carefully to Table 2 in WBCSD’s Innovation should fully understand scrutinize the downside risks in Power Purchase Agreement before entering into a contract stemming from market movements Structures report. of this type. and policy changes. Table 2 outlines the three risks This chapter describes market and Three key risks affect a XB PPA in that have a different impact for XB policy-related risks and contracting a different manner to an in-market PPAs and highlights the issues complexity that specifically result PPA: basis risk, price risk and specific to virtual and physical XB from XB PPAs. These are in addition change in law risk. The fact that the PPA structures respectively. As the to the risks that in-market PPAs parties contract the PPA across implications of basis risk for virtual already contain and allocate different electricity markets does XB PPAs and cross-border power between parties. not directly impact development transmission for physical XB PPAs risk, performance risk, balancing are complex and require more risk, volume risk, profile risk and explanation, we address these in force majeure risk; we therefore more detail following Table 2. do not address them in this report.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 20 Table 2: Market and policy-related risks with particular impacts for XB PPAs

Risk What it means for Specificities for Specificities for type XB PPAs virtual XB PPAs physical XB PPAs12 Basis A primary consideration for a Basis risk is inherent to a virtual Basis risk does not usually risk XB PPA is the price correlation XB PPA as the wholesale apply to a physical XB PPA between the market(s) electricity prices in the market(s) itself, as the price payable where the generation asset where the assets are located is the agreed price for the is located and the market(s) may not correlate with the electricity rather than a where the load is located. If wholesale price in the market(s) net price determined by the relevant prices do not where the load is located. The reference to a market price. move in tandem, this will lead allocation of basis risk to the However, if variable price to the (virtual) PPA providing corporate buyer or power structures are included to an imperfect hedge for the producer (depending on which hedge part or all the volume corporate buyer (assuming market the PPA payments are of a physical XB PPA, then the power producer sells net-settled against) will be a key basis risk would be relevant. the generated power into negotiation point. the market of asset location) – and thus continued Further detail on virtual XB exposure to price volatility PPA basis risk allocation and (see ‘Implications of basis mitigation options is available risk’). Variations in currency in ‘Implications of basis risk for between markets (e.g. GBP to virtual XB PPAs’. EUR) may exacerbate this risk. Price risk Price risk for XB PPAs results Lower wholesale power prices in Lower wholesale power from changes in the various the market(s) of the generation prices and the resulting drivers that impact electricity asset location are a risk in a additional export of power prices in the markets of asset virtual XB PPA (assuming that to neighboring markets with location and/or load location(s). the corporate buyer is bearing higher wholesale prices would the basis risk and has not lead to a wider market spread For example, changes in the mitigated that risk) because the and an increase in the price energy mix over time can net-settlement between the of interconnection capacity drive price risk. A reduction wholesale power price in the rights for physical XB PPAs (if in fossil fuel generation and/ market of the asset location and not hedged appropriately). or an increase in renewable the agreed PPA price can result generation over time has the in the corporate buyer paying Price risk resulting from potential to negatively affect the difference versus that lower interconnector capacity XB PPA pricing by leading wholesale power price while still auctions applies to physical XB to lower wholesale power paying higher wholesale power PPAs only; see further details prices, particularly when prices in the market(s) of their in ‘Implications of cross- interconnector capacity to load location. border power transmission for neighboring markets is limited. physical XB PPAs’. Change Policies or regulations may Where a virtual XB PPA is priced Changes in policy, in law change in each market over by reference to the market regulation, transmission and risk the course of the PPA tenor, where the asset is located, the interconnector rules all have affecting the operational primary change in law risk is in the potential to affect physical management and financial that of the wholesale electricity XB PPAs. This may include performance of the XB PPA. market of asset location. This changes to taxes or market In addition to the market(s) may include changes to policy design. Dealing with this of the generation asset and regulation. Dealing with under a physical XB PPA will location and market(s) of this under a virtual XB PPA will depend on the negotiation of load location, it is necessary depend on the negotiation of its its terms (for example, in what to consider all intervening terms. circumstances such changes transmission markets. will enable a discussion on economic impacts).

12 The physical XB PPA structure – using the definition in this report – presents considerable uncertainty and risk and there are therefore no known examples in Europe today (see an explanation in ‘Implications of cross-border power transmission for physical XB PPAs’). For completeness, and as innovative approaches to physical XB PPAs may be developed in the future, we have provided commentary on physical XB PPAs in this table in addition to the more established virtual XB PPA structure.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 21 Implications of basis is generated to the wholesale Another strategy would involve a risk for virtual XB PPAs electricity prices in each market corporate buyer accepting basis where load is located. Price risk but then looking to mitigate Allocating basis risk differences will change over the the impact via a hedging strategy, Virtual XB PPAs require the duration of the PPA, driven by for example by paying a wholesale contracting parties to agree on the several factors, such as wholesale market trader to take on the basis allocation of basis risk. The agreed electricity price reductions due to risk. Currently there is limited PPA price is net-settled against the increased renewable electricity availability of such products in price the generator receives when generation, or the retiring of coal European markets and where selling the produced power into and nuclear assets. hedging products are available, the wholesale market. Basis risk they will usually be for short tenors is the potential lack of correlation Mitigating the impact of (e.g., 1-2 years). Some power between the price in the wholesale basis risk producers with strength in both market where the asset is located the development of renewable Where a corporate buyer is primarily electricity projects and electricity and the price in the wholesale liable for basis risk, it can seek to market where the load is located.13 trading may be able to internalize mitigate the impact of that risk by the risk for a premium. The corporate buyer would bear using different pricing structures the basis risk in a virtual XB PPA and dedicated hedging strategies. A further example of a hedging when the agreed PPA price is net- strategy (used predominantly in the settled against the wholesale price An example of the former would United States) is a “fixed-volume in the market where the electricity be to not accept the entirety of swap”, which can significantly is produced, not in the market the risk by using a “cap and floor” reduce the impact of basis risk where the corporate buyer’s load is virtual PPA. This would reduce the 14 for the corporate buyer. Under a located . If the wholesale prices in impact of basis risk for a corporate fixed-volume swap, in any given each of these markets do not move buyer by limiting the range across hour the hedge provider takes in tandem, this will lead to the virtual which the net-settled PPA price the variable net-settled price and PPA providing an imperfect hedge can fluctuate. This so-called “collar” pays a fixed price to the corporate for the corporate buyer – and thus comprises the maximum (cap) and buyer, for a fixed volume of power continued exposure to volatility in minimum (floor) price payable. This, 15 as agreed between the two parties. power purchasing. however, does mean that the power As this structure is based on a producer will bear some of the Therefore, assuming the corporate fixed-volume commitment, the impact of the basis risk (whenever corporate buyer is responsible for buyer bears the basis risk, it the net-settled PPA price is outside will need to evaluate the price managing the resulting shape and the collar range) and therefore will volume risk.16 correlations between wholesale be relevant to lender-assessment of electricity prices in the market(s) the project. Risk mitigation strategies – where the electricity is generated particularly those managed by a and in the market(s) where the load third-party or the power producer is located (and potentially account – come with additional costs. It for currency differences). If the is therefore important to weigh virtual XB PPA is covering load in the additional costs against the multiple markets, the analysis of economic upside that a virtual XB price correlations must compare PPA may provide to evaluate the the wholesale electricity price in overall economic viability of the the market where the electricity commercial pricing terms of the PPA.

13 It is important to note that there are slight variations in the current definitions of basis risk used by different market actors. Some actors use different naming convention (e.g. basis risk for developers, but hedge risk for corporate buyers). Others are including the price differential between the wholesale and retail prices in the market where the load is located within the basis risk definition. It is therefore essential to ensure that all contracting parties use a common definition to avoid misunderstanding. 14 Alternatively, the agreed PPA price can be net-settled against the wholesale price in the market where the corporate buyer’s load is located. In this instance, the developer is taking on the basis risk. To date it has been more common for basis risk to be borne by the corporate buyer. 15 As price convergence increases across markets in Europe, basis risk decreases for XB PPAs. An increase in market coupling and an expansion of interconnector capacity in Europe will drive greater price convergence across markets. 16 For further information on fixed-volume swaps and their impact on risk, please see: The “P99 hedge” that wasn’t (May 2019)

Cross-border renewable PPAs in Europe: An overview for corporate buyers 22 Implications of Obtaining interconnector receiving capacity rights for the full cross-border power capacity rights for the year in question, increase workload transmission for duration of the XB PPA and reduce price visibility. physical XB PPAs As explained in ‘Annex: Process of To reduce the uncertainty of When using an interconnector to power trading on interconnectors obtaining interconnector capacity physically flow electricity from one in Europe’, the ability to purchase rights for the duration of the PPA market to another for a physical interconnector capacity rights in contract, some market players XB PPA, complexities arise from a auctions in Europe is commonly are advocating for interconnector mismatch between the purpose of limited to one year and therefore capacity auctions that enable the the existing rules of cross-border mismatches the typical tenor purchase of capacity rights further of 10-15-year PPAs. Even if the power trading on interconnectors 17 into the future, such as 5-, 10- or and the purpose of long-term PPAs: responsible party is successfully 15-year auctions. Even if it were interconnector capacity rights (i.e. awarded annual capacity rights for possible to purchase capacity rights PTRs and FTRs) are predominantly the first year of a 15-year physical on a 5-, 10- or 15-year basis, it used as financial contracts to XB PPA, it would need to participate would not be possible to accurately enable efficient trading of power in 14 additional annual auctions forecast the market price spread over the interconnector and are throughout the PPA’s lifetime. This for such tenors and the responsible not designed for the purpose of adds a high degree of uncertainty to party would likely be unwilling to physically delivering power for an the PPA, both in terms of whether the shoulder the significant risk and individual long-term PPA contract capacity rights will be awarded each upfront investment. In short, there aiming for price visibility. This year (i.e., if the bid is high enough) is a mismatch between the purpose creates two main risks for the party and the change in auction prices for of interconnector capacity auctions responsible for trading power over those capacity rights over time. and PPAs – interconnector capacity the interconnector for a physical XB If the responsible party does not auctions are designed for trading PPAs: (1) obtaining interconnector receive annual capacity rights for any electricity efficiently between two capacity rights for the duration of the one year, it can instead participate markets, not for the physical delivery XB PPA; and (2) managing the price in monthly or daily auctions, though of power in long-term individual risk that arises from the auctioning this may reduce the probability of PPAs aiming to reduce risk. of interconnector capacity rights and from the price spread between all markets concerned. Both are explained in more detail in this section to outline why the physical XB PPA structure – using the definition in this report – presents uncertainty and risk.

Readers who are not familiar with cross-border electricity trading and the use of physical transmission rights (PTRs) and financial transmission rights (FTRs) in Europe can find an explanation in the Annex: Process of power trading on interconnectors in Europe.

17 It is possible to allocate the responsibility to secure interconnector capacity rights to the corporate buyer (to, for example, enhance the bankability of the project) or to the power producer, or both parties can share the responsibility.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 23 Managing cross-border ii. if the auction price of the and whether they have other drivers transmission price risk capacity rights turns out to be for choosing a physical XB border Price risk relates to price correct (i.e., equal to the actual structure, such as those described exposure of parties to a PPA over price spread between market A earlier in ‘XB PPA drivers and benefits’. its tenor. The auction price for and market B), the responsible party will pay exactly the price Today, there are no publicly known interconnector capacity rights examples of successfully executed is determined by the forecasted spread for their capacity rights and therefore any price savings physical XB PPAs in Europe due to market price spread between the risks outlined above19 and the market A and market B made by from a lower price in market A are negated; and mismatch between the purpose of the various bidding parties, over the cross-border electricity trading the auction period (whether annual, 18 iii. if the auction price is higher rules and the purpose of a physical monthly or daily). Cross-border than the actual price spread, the XB PPA to achieve price visibility. transmission price risk arises in a responsible party would pay a physical XB PPA for the responsible higher price by flowing electricity In the long term, an increase in party where the awarded auction market coupling20 and an expansion from market A to market B and 21 price does not match the actual realize a loss. In this case, the of interconnector capacity in price spread between the two most economical option may Europe will drive greater price markets over the chosen period be to decide not to transmit the convergence across markets and (annual, monthly or daily). electricity but instead to sell the larger single market areas would electricity from the PPA asset in remove the need for obtaining and For example, where the responsible using interconnector capacity rights party wishes to transmit power from market A and purchase electricity for the corporate buyer’s facilities as described above altogether. market A (market of generation In the meantime, pan-European asset) to market B (market of in market B, i.e., not executing the physical XB PPA. energy suppliers may innovate the load location) because generally theoretical physical XB PPA structure electricity prices in market B are As a result, depending on the described in this report to effectively higher than in market A and the difference between the auction evidence physical delivery of power price in market A equals the agreed price and the actual market price without engaging in cross-border PPA price: spreads, the responsible party will trading on interconnectors for i. if the auction price is lower take on considerable price risk which individual contracts. than the actual price spread, may not align with their desire to the responsible party will pay a achieve price visibility with a PPA. This lower price by flowing electricity means a physical XB PPA – using the from market A to market B and defintion in this report – will depend realize a price saving; on the risk appetite of a corporate buyer, their ability to negotiate a PPA price lower than the price in market A

18 Where a physical XB PPA is signed for two non-neighboring markets, the same activity must be undertaken for the intermediary market. 19 For completeness, the responsible party is exposed to volume risk as well as to price risk, as capacity rights purchased in advance cannot exactly match the volume of power generated and transmitted as part of the PPA (with the exception of a fixed baseload PPA). The responsible party is exposed to volume risk for: (a) the missing power supply (for which it is necessary to purchase additional capacity rights in daily auctions); or (b) the volume of capacity rights not nominated, such as FTR and excess PTR (which will be lost or sold). Where the volume of capacity rights does not match the volume of electricity generated, the TSO may purchase electricity in market A/B and sell in market B/A on the responsible party’s behalf, as explained in ‘Using interconnector capacity rights’ in the annex. 20 19 European countries are currently part of the Multi-Regional Coupling (MRC) and the European Union plans to continue to add markets to eventually create a single pan-European electricity market. 21 Interconnector capacity across Europe is currently limited between certain markets, particularly southern markets such as Spain and Portugal, which limits price convergence between markets. Europe aims to increase interconnector capacity equivalent to 15% of total power generation capacity by 2030, and is currently just over halfway to target. For more information on interconnector targets, see: https:// ec.europa.eu/energy/topics/infrastructure/electricity-interconnection-targets_en

Cross-border renewable PPAs in Europe: An overview for corporate buyers 24 Sourcing and require a significant pan-European number of contracts covering loads contracting sourcing activity that may be in several markets. complexity unfamiliar to in-house procurement teams. However, there is also an Table 3 outlines the key elements of The complexity of contracts is the upside, which includes the potential complexity and the implications for most challenging hurdle for many simplification and consolidation of corporate buyers. corporate buyers considering a XB sourcing activities under a smaller PPA. The execution of a XB PPA may

Table 3: Sourcing and contracting complexities for XB PPAs and their implications for corporate buyers

Category Description and implications for corporate buyers Sourcing Key considerations when undertaking a XB PPA sourcing process include: process • In general, XB PPAs are more complex than in-market PPAs due to the involvement of (at least) two electricity markets. A XB PPA requires thorough market expertise to understand and gain comfort with the fundamentals of each market’s political and regulatory framework, market fundamentals and resulting key risks. • Going market-by-market to source renewable power via physical in-market or physical XB PPA contracts takes time and resources and requires careful tracking of terms. • Using a competitive bid process to contract a suitable project is generally advisable as there are variations in price and in development and construction risks between power producers. By comparing projects based on overall benefit and risk, corporate buyers can find the most suitable deal for their requirements.

Accounting One of the largest complexities in a PPA is the accounting implications. XB PPAs don’t trigger implications additional IFRS accounting implications compared to in-market PPAs, but as accounting of PPAs is a key concern for virtual PPAs (which are currently the preferred model for XB PPAs), we include the implications here to reiterate their importance in the decision-making process.

For companies reporting under IFRS, a contract that includes net-settlement – meaning that the company is subject to gains or losses depending on the outcome of the difference between the wholesale power price and the agreed upon PPA price (like in a virtual PPA) – may be viewed as a derivative. A company’s position on derivative and mark-to-market accounting under IFRS may guide its decision to use a virtual PPA structure or not. European and/or local financial services laws usually also treat a virtual PPA as a financial instrument. Ultimately, accounting treatment depends on the contract structure, volatility of the asset, and the risks that can be managed through other means.

Accounting practices as well as interpretation of relevant rules cannot be sufficiently discussed within this report. Third-party advisors, financial auditors and legal counsel must evaluate the correct accounting treatment for every PPA. For further commentary, see IFRS accounting outline for Power Purchase Agreements.

Credit Power producers and financiers typically require evidence that the corporate buyer expects implications to be financially fungible over the duration of the contract. For XB PPAs, one corporate buyer entity may be a party to a XB PPA for several of its affiliated companies in Europe. This will raise important internal discussions regarding, for example, how the group of companies benefiting from the XB PPA shares or allocates the credit (and other) risks. Such decisions will likely require the engagement of European-wide energy procurement professionals and senior stakeholders. It may be necessary to engage colleagues outside Europe if the corporate buyer has its headquarters elsewhere.

Legal A XB PPA may increase legal complexity. Like with credit risk, companies should ask questions implications about local and corporate legal authority and who has the ultimate authority to make legal decisions. In addition, each market has its own legal system, which will need consideration depending on the structuring of the XB PPA contract.

Taxation Taxation implications may arise for all parties to a XB PPA. Parties must engage their tax implications departments to understand the tax implications that would apply to them.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 25 Case study: In January 2020, AB InBev to aggregate demand from AB InBev powers European announced the largest pan- several countries to contribute to breweries with virtual European PPA signed to date the build-out of new solar power cross-border PPA to purchase 100% renewable plants. electricity for its European brewing operations. This deal will enable all of AB Structure: Virtual XB PPA InBev’s European-brewed Generation market: Spain The 10-year virtual cross-border beers to be produced with Offtake markets: Belgium, PPA will cover the electricity 100% renewable electricity. A Germany, the Netherlands, the demand of AB InBev’s 14 new symbol on the Budweiser Canary Islands and Luxemburg breweries in Western Europe pack amplifies the sustainability Capacity: 130 MW with 130 MW of capacity from message for consumers two new solar farms in Spain. and encourages sustainable Technology: Solar PV Choosing a virtual cross-border consumer choice. Tenor: 10 years PPA structure enabled AB InBev

Key learnings “Choosing a virtual cross-border PPA structure enabled us to maximize our impact across Europe. My advice for others considering a similar approach is to cast a wide net when screening for potential projects and partners, to identify the right choices for your company and intended impact. Corporate buyers should make sure they are comfortable with the virtual PPA structure from an accounting standpoint early on in the process, to strengthen internal buy-in from the start.” Moritz Bernhoerster, Director Global Procurement, AB InBev

Cross-border renewable PPAs in Europe: An overview for corporate buyers 26 5 GO treatment and affiliated renewable electricity procurement claims

Cross-border renewable PPAs in Europe: An overview for corporate buyers 27 5 GO treatment and affiliated renewable electricity procurement claims

The GOs of any renewable own and cancel the GOs affiliated As a result, corporate buyers should PPA drive its environmental with the asset(s) covered by perform a thorough analysis of value for a corporate buyer. the PPA in a 1:1 ratio with their GO management in each market GOs are traceable by their electricity generation (i.e., one where they have PPA projects and unique reference numbers, certificate for one megawatt electricity load – should they intend making them a credible hour of power produced). A to transfer the GOs to each load form of evidence when fundamental consideration for market and then cancel them in making renewable electricity XB PPAs is therefore how each each market’s registry. procurement and carbon market involved in the XB PPA treats reduction claims. Without GOs, including the market(s) of As an alternative to cancelling GOs GOs, the corporate buyer may generation as well as the market(s) in each load market, a corporate receive economic benefits of the company’s load. Treatment buyer can contract a XB PPA in a from a XB PPA but cannot can vary from market to market market that accommodates the make evidenced carbon and understanding the rules is cancellation of GOs that do not reduction claims.22 necessary when evaluating either match their in-market load, which 24 is the case for the majority of AIB XB PPA model. 25 According to the EU Renewable member countries. In such cases, Energy Directive, every EU Some markets: the power producer can cancel country must implement its own the GOs on behalf of the corporate national GO certificate system, • Allow the transfer of GOs buyer in the market where the which means that systems may across market borders for electricity and GOs are generated, differ from country to country. cancellation in a different requiring a single cancellation The Association of Issuing market; fee, and it is then possible to Bodies (AIB), which represents 27 • Prohibit the cancellation apply the associated claims on a national issuing bodies, created of more GOs than there is pan-European basis. In order to the European Energy Certificate understand the restrictions in each 23 matching load for in that System (EECS) in 2002 to market, while others allow the market, the corporate buyer should standardize GO certificate systems cancellation of the excess; refer to the EECS domain protocols across its member countries. and the AIB datasheet on imposed The standardization of certificate • Do not require the corporate conditions for trade, expiry and systems increases transparency buyer to have load in the market cancellation. and credibility for GO accounting. where it purchases and cancels the GOs; Corporate buyers should be mindful of any potential changes GO treatment for • Have fees for GO cancellation or to current regulations on how to XB PPAs for excess cancellation; and/or and who can cancel GOs and make Corporate buyers can use XB sure the XB PPA contract accounts PPAs to make renewable electricity • Allow only local suppliers to for future changes to regulation procurement claims when they cancel GOs. (see footnote 24).

22 For further information on the GO system in Europe, see https://www.aib-net.org/certification. For further commentary on EACs for corporate renewable PPAs, see WBCSD report Innovation in Power Purchase Agreement Structures (March 2018). 23 For more information, see https://www.aib-net.org/eecs. 24 The current legal framework for treatment of GOs is set by the 2009 Renewable Energy Directive (RED). This law has been superseded by the Recast Renewable Energy Directive (REDII), which entered into force in December 2018. The new law will increase standardization of GO treatment across EU countries, which member countries must fully implement into national law by the end of July 2021. See the Guide to REDII Article 19 Implementation (RECS International, March 2019) for further information. 25 This is especially relevant for physical XB PPAs with cross-border electricity trading, where if market prices are higher in the market where the electricity is produced, power will flow in the opposite direction on the interconnector and the nominated power cannot be transmitted. The ability to cancel GOs in the market of generation ensures that the corporate buyer can still receive the environmental attributes associated with the project in times of reverse flow.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 28 GO disclosure and boundary" in Europe is essential • Guidance on the accounting of reporting for XB PPAs to be able to make evidenced Scope 2 emissions issued by carbon reduction claims from CDP issued in July 2020 states It is not sufficient to be allowed renewable electricity procurement that from 1 January 2022 the to cancel GOs generated in one through a XB PPA in Europe. market boundary in Europe market to cover demand in another will encompass AIB member market – corporate buyers must 31 The Scope 2 Quality Criteria refer countries, whereas for all also understand the guidance on to market boundaries but leave the non-AIB member countries GO disclosure and reporting to be determination of a market boundary the market boundary will be able to make evidenced carbon open to interpretation, directing the same as their geographical reduction claims for a XB PPA. corporate buyers instead to follow boundary. Contracts signed guidance from regulatory authorities The GHG Protocol Scope 2 Guidance up until 31 December 2021 and/or certificate issuing bodies. standardizes how corporate buyers outside of the AIB market boundary will be accepted for measure emissions from purchased In Europe, AIB member countries CDP reporting until the end of or acquired electricity using two allow the transfer of GOs to other AIB the respective contract period. accounting methods: location-based member countries, as well as to non- and market-based.26 For a XB PPA, AIB member countries through ‘Ex NB: this guidance is current as of corporate buyers must use the 29 Domain Cancellations’. However, December 2020 and is liable to market-based accounting method from a reporting standpoint, there change. Please check sources for in addition to the location-based are different interpretations of what updated guidance. method, as it reflects emissions constitutes an acceptable market from electricity that companies 27 boundary when using contractual While the definitions will differ from have purposefully chosen. For the instruments (including PPAs and 1 January 2022 and have changed market-based accounting method, GOs) to make evidenced carbon over time, the main message is corporate buyers must state the reduction claims in Europe, even if Ex that the higher the traceability and origin of GOs and ensure that they Domain Cancellations are permitted: transparency of the approach that a adhere to Scope 2 Quality Criteria. corporate buyer chooses, the more • Market boundary guidance robust the renewable electricity For XB PPAs, a key consideration issued by RE100 in May 2019 procurement claim is. In the future, within the Scope 2 Quality Criteria states that the majority of we hope to see a market consensus is that the contractual instruments European countries make up on the definition of a market (including PPAs and GOs) must be a single market for renewable boundary in Europe for reporting “sourced from the same market electricity sourcing and purposes. As the AIB increases its in which the reporting entity’s reporting, meaning that the membership regularly, the above electricity-consuming operations market boundary encompasses two definitions are expected move are located and to which the 28 all countries within the closer to agreement over time. instrument is applied”. Therefore European Single Market.30 the definition of a "market

“GO treatment was an important factor in our decision to choose a virtual cross-border PPA. Under Spanish domain protocol today, both the power producer and/or retail licensed supplier can cancel the GOs on behalf of the corporate buyer and cancellation of GOs can be done in excess of in-market load. Moreover, GOs issued in Spain can be exported and canceled in all AIB member countries. This allows Novartis to claim and report renewable electricity procurement for all generation affiliated with our virtual cross-border PPA.” Mark Scoffin, Head of Procurement – Utilities, Novartis

26 A location-based method reflects the average emissions intensity of grids on which energy consumption occurs (using mostly grid-average emission factor data). A market-based method reflects emissions from electricity that companies have purposefully chosen. 27 Corporate buyers using contractual instruments, such as a XB PPA, must report Scope 2 emissions using both the location-based method and the market-based method. This is also known as “dual reporting.” See section 1.5.1 of the GHG Protocol Scope 2 Guidance. 28 GHG Protocol Scope 2 Guidance, p. 60 29 For more information, see: https://www.aib-net.org/facts/market-information/statistics/ex-domain-cancellations 30 Defined as countries from the European Union (EU-28) and the European Economic Area, but excludes Iceland, which does not have an interconnection to mainland Europe. 31 For a full list of AIB members and prospective members, see: https://www.aib-net.org/facts/aib-member-countries-regions/aib-members

Cross-border renewable PPAs in Europe: An overview for corporate buyers 29 Case study: Philips and Signify, announced European footprint, by joining HEINEKEN, Nouryon, Royal the signing of a joint virtual forces and making significant Philips and Signify team up cross-border PPA in Finland. With progress towards their ambitious to combat climate change advisory support from Schneider individual sustainability and with virtual cross-border Electric, the PPA was signed renewable electricity targets. with French renewable energy PPA in Europe developer Neoen for a 126 A key reason for choosing the MW portion of the Mutkalampi virtual cross-border structure Structure: Virtual cross-border onshore wind farm, located in the was to allow the companies to PPA west of Finland. retire the GOs from the project Generation market: Finland on a pan-European basis, to Power producer: Neoen The Consortium represents address the electricity footprint global sustainability leaders in countries where the in-country Capacity: 126 MW across a broad range of industry load is too small to address Technology: Onshore wind sectors: chemicals, health with individual PPAs. In total, Tenor: 10 years technology, lighting and brewing. the Consortium’s part of the The virtual cross-border PPA Mutkalampi wind farm is expected In December 2020, a consortium structure enabled them to take to add over 330 GWh of clean of four leading Dutch companies, a collaborative and innovative electricity to the grid annually. HEINEKEN, Nouryon, Royal approach to addressing their

Key learnings: “When a group of companies joins forces on a project like this, they can have a bigger impact and accelerate the transition to renewable electricity sources. This is key to address the European electricity footprints of all companies involved in a scalable and impactful way, as well as to achieve the targets as set out by the Paris Agreement. One of our key learnings is that you need to team up with likeminded sustainable companies for it to become a success. We hope to inspire other companies to follow this example by considering multi- buyer structures to maximize their impact when sourcing renewable energy.” Bas Lubach, Global Category Buyer Energy, Heineken

Cross-border renewable PPAs in Europe: An overview for corporate buyers 30 6 Internal and external communications for XB PPAs

Cross-border renewable PPAs in Europe: An overview for corporate buyers 31 6 Internal and external communications for XB PPAs

The concept of a European • Share the impact that the XB Such information will also help XB PPA is relatively new PPA has on the company’s NGOs support the development to corporate buyers, renewable electricity purchasing of more XB PPAs. Their position on project developers, and the targets, as well as on the XB PPAs varies worldwide, but in associations and NGOs that national electricity system in all Europe, where there is a high level of help to shape and guide the markets involved; and interconnection and geographical market, particularly when proximity between markets, many it comes to communicating • Use reporting standards to do see XB PPAs as a credible environmental claims. evidence that the XB PPA method of corporate renewable meets recognized guidance for electricity sourcing as long as: Clear internal and external making renewable claims. communications help stakeholders 1. The XB PPA adheres to understand the drivers behind a reporting standards for company’s selected approach and For example, a corporate making environmental claims the intended impact – which the buyer may be able to achieve (see ‘GO treatment and individual company strategy often a better yield and price from affiliated renewable electricity ultimately drives. a solar PPA by procuring procurement claims’); and power in a market with When communicating externally higher load factors, such 2. The corporate buyer has about XB PPAs, corporate buyers as Spain (i.e., where higher considered procuring electricity should: solar radiation results in in-market and concluded that higher electricity production), the driver(s) for selecting a XB • Be transparent about the to meet its electricity PPA are sufficient to warrant a details of the project they demand in a market with preference over an in-market are buying electricity from, a lower load factor, such PPA. including location, technology, as in Belgium. This has a Effective internal communication size and additionality; wider electricity system is just as important as external impact by encouraging • Clearly state the drivers for communication. Generally, the development of solar choosing this contract type corporate renewable PPAs involve projects in the locations best and explain how it fits with their a significant number of internal suited to that generation wider portfolio of renewable stakeholders due to their size, technology and thereby electricity procurement and complexity, risk profile and public/ optimizing resources. their company’s procurement NGO visibility and scrutiny. A XB strategy; PPA amplifies the complexity of internal stakeholder engagement when stakeholders – including senior stakeholders – from a variety of countries, who speak a variety of languages and have a variety of concerns must cooperate. Clarifying the key decisions to internal stakeholders at an early stage will increase understanding and internal buy-in.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 32 Case study: Key learnings: DSM on course to outpace “Breaking ground with new contract structures can their 75% renewable electricity target with introduce complexity compared to a business-as-usual virtual cross-border PPA in approach, but the outcome can have a greater impact Europe on driving the energy transition. Internal communication is essential from day one and remains extremely Structure: Virtual XB PPA important throughout the process. For a cross-border Generation market: Spain PPA structure, internal stakeholders need to be brought Offtake markets: 9 European along on the decision-making process of choosing countries a cross-border rather than in-market structure and Power producer: EDPR selecting a virtual rather than physical cross-border Capacity: 76 MW PPA. Corporate buyers should consult industry Technology: Solar PV and onshore wind standards (e.g. market boundary guidance from RE100 Tenor: 15 years and CDP) and drive forward the option that has the

In April 2020, nutrition, health and largest impact whilst making business sense.” sustainable living company Royal Sim van der Linde, Project Director Renewable DSM signed its largest PPA in Energy, Royal DSM Europe to date: a virtual cross- border PPA to source electricity from one wind farm and two solar power plants in Spain.

The virtual cross-border PPA covers the electricity demand of DSM facilities in 9 countries across Europe. Combining these loads and using them to contribute to the development of new wind and solar capacity was the main driver for choosing a cross-border structure. As all 9 countries fall within the market boundary guidelines from RE100 and CDP, the loads can be bundled together under a single cross-border PPA.

With the announcement of this deal, DSM is on course to outpace their target of reaching 75% of purchased electricity from renewable sources by 2030, also being an important part in delivering against their Science Based Target.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 33 7 Conclusion

Cross-border renewable PPAs in Europe: An overview for corporate buyers 34 7 Conclusion

The concept of a XB PPA • Companies considering XB • It is necessary to weigh the (or pan-European PPA) is PPAs should learn about the challenges of executing a multi- relatively new to corporate differences between in-market market contract at significant buyers, project developers, and XB PPAs, as well as the scale – such as stakeholder utilities, traders and NGOs. distinction between physical management across a diverse Companies have already and virtual XB PPAs. deal team and credit ownership – against the potential benefits signed the first virtual XB � PPAs in Europe and favorable Virtual XB PPAs introduce that a XB PPA may provide. project economics are increased basis risk attracting more corporate compared to in-market Despite the complexities, as buyers to consider XB PPAs. virtual PPAs, due to price renewable electricity markets An ever-more connected differences between in Europe continue to grow and electricity market in Europe the electricity market of mature, more companies may favor and the single GO system are generation and loads. IFRS the XB PPA model for its upsides. supporting the feasibility and accounting implications We expect to see innovation in acceptability of XB PPAs for all may arise for both virtual XB the sourcing and contracting of market players alike. and in-market PPAs. XB PPAs in Europe in the coming years, particularly to tackle the � XB PPAs may provide corporate Physical XB PPAs risk mitigation and management buyers with additional benefits introduce cross-border challenges laid out in this report. compared to in-market PPAs, transmission price risk With these innovations and a including the ability to aggregate and to date, complexities supportive enabling environment, their load in different locations arising from a mismatch XB PPAs have the potential to make under a single XB PPA contract and between the purpose of a material contribution to additional therefore the opportunity to source the existing rules of cross- renewable electricity deployment in renewable electricity at a large scale border power trading on Europe. to meet environmental goals faster. interconnectors and the needs for long-term PPAs However, XB PPA sourcing and have been prohibitive for contracting can be complex and it physical XB PPA structures is important that corporate buyers in Europe. fully understand the risks before entering into a contract of this type, • Corporate buyers should also including but not limited to: ensure they understand how GOs will be treated in any XB • Like all PPAs, XB PPAs require PPA they are evaluating, so due diligence to ensure that that they adhere to the relevant all counterparties have been reporting standard and ensure assigned and are adequately the use of the certificates to managing the risks they make legitimate environmental are best placed to manage. claims. The added sourcing and contracting complexity for XB PPAs increases the need for a thorough and robust due diligence process.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 35 Annex: Process of power trading on interconnectors in Europe

An interconnector is the this is determined by the wholesale (though derogation may be required). physical power line that allows power prices in each market and the As TSOs commonly sell capacity the exchange of electricity capacity allocation and congestion rights through explicit auctions at a 32 between two neighboring management guidelines. loss, there are also several borders markets. Interconnectors that do not allow the offering of capacity rights in any form to prevent contribute to security of Obtaining supply, stabilize grid frequency losses resulting in increased network and enable commercial power interconnector tariffs for local consumers. flows between electricity capacity rights markets. They are operated by Market participants typically Capacity rights currently have a transmission system operators gain access to interconnectors maximum duration of one year (TSOs), which can be wholly by purchasing capacity rights for almost all auctions. In Europe, or partially publicly-owned, or (i.e., capacity options) through the auction works with a marginal wholly privately-owned. competitive annual, monthly pricing mechanism in which market and daily explicit auctions and participants’ bids are placed in Cross-border electricity daily implicit auctions.33 The merit order, from the highest to the trading using interconnectors TSOs have created platforms lowest, and the saturation of the predominantly takes place in four and rules to standardize the capacity offered in that auction parts: (1) electricity purchase auction mechanisms34 including determines the auction marginal in market A; (2) purchase of the requirement that part of the price. All bids greater than or equal interconnector capacity rights via interconnector capacity may be to the marginal price are awarded auctions; and (3) use, loss or sale of withheld from auctions to remain with the determined marginal 35 purchased interconnector capacity available to TSOs to ensure system price. Bids are generally based on rights; and (4) if the interconnector security. Capacity may also be market participants’ expectations capacity rights are used, flow of the awarded through bilateral contracts for the price spread between the corresponding volume of electricity two markets concerned. from market A to market B and electricity sale in market B.

It is important to recognize that interconnectors have physical capacity limits on the volume of power they can flow from one market to another. The purchased capacity rights will be either physical (PTRs) or financial (FTRs), as determined by the regulator, which affects whether the capacity rights can be used, lost or sold. There may also be restrictions on time of use (such as in the case of maintenance) and, in Europe, on the direction of power flow, because

32 Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion management (CACM). 33 For implicit auctions, capacity rights and electricity are auctioned together, which ensures that the power flow will be from the low-price market to the high-price market. Implicit auctions are applicable for short-term capacity rights (predominantly daily) and are therefore not explained in this report. A short explainer on explicit and implicit capacity auctions can be found here. 34 For example, see Joint Allocation Office for Central Western Europe and Italy: https://www.jao.eu/main 35 Auction results can be found here.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 36 Using interconnector • Choose not to use the capacity A to market B. Even with accurate capacity rights on a daily basis. The capacity electricity generation forecasts, the will then be automatically day-ahead forecast can never be When capacity rights are purchased reallocated in daily implicit 100% correct. If the responsible on an annual basis, explicit auctions auctions if a “Use it or Sell party nominates a higher/lower are employed. In an explicit auction, it” rule applies (where the volume than produced, the TSO interconnector capacity is auctioned 36 responsible party receives will purchase electricity in market independently from electricity. remuneration via the daily A/B and sell in market B/A on the Where the volume intended to auctions with a market spread responsible party’s behalf (unless be transmitted is variable, the between market A to market B the responsible party makes responsible party may bid for the or zero, whichever number is intraday trades to balance the maximum capacity or a proportion larger); or is lost and remitted to mismatch before gate closure for thereof and will then need to sell or the interconnector operator if each hour). For these reasons, the buy the excess or missing capacity a “Use it or Lose it” rule applies process of nominating capacity rights in daily auctions. (in which case the responsible rights is complex and it is necessary For explicit auctions, the obtained party forfeits the amount paid to manage it carefully to minimize capacity rights will be either physical for the PTR). the costs of these corrections (PTRs) or financial (FTRs), as taken by the TSO on behalf of the • Nominate and use a proportion determined by the regulator, which responsible party. of the capacity rights and will affect the way that the capacity sell or lose the remainder, In the case of FTRs, the responsible rights can be used. FTRs are more where the expected volume party cannot choose to use the commonly issued in Europe. of generated power is lower capacity rights. Instead, the same In the case of PTRs, the responsible than the volume of previously process as described for a PTR 37 party who has been awarded annual obtained capacity rights. with “Use it or Sell it” when capacity capacity rights may: is not nominated will happen If the responsible party chooses to automatically. The owner of an FTR • Use the capacity by use the capacity rights, it nominates will receive a payout for each hour nominating its use daily to separate volumes for each hour based on either the price in market the interconnector operator. at the day-ahead stage. Once it B minus the price in market A and Nomination must be done has nominated capacity rights, the zero, whichever is higher.38 before the SDAC gate closure responsible party must transfer time and is generally binding. the nominated volume from market

36 A short explainer on explicit and implicit capacity auctions can be found here. 37 Participants may also resell the awarded capacity on a secondary market on an annual or monthly basis, though this is interconnector trading speculation. 38 Note that FTRs are available in two different versions: FTR Options and FTR Obligations. The described form here is FTR Options, where the payout equals the sum of the positive price differences from market A to market B. For an FTR Obligation, the payout is the sum of both the negative and the positive price differences from market A to market B. The Nordic EPADs (Electricity Price Area Differentials) are financially similar to FTR Obligations. All other FTRs in Europe are FTR Options.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 37 Glossary

Cross-border PPA: A PPA where European Single Market: A Pan-European PPA: A cross- a corporate buyer purchases geographic area that covers EU border PPA where the corporate renewable electricity and GOs Member States plus the European buyer procures power for its load generated outside the electricity Economic Area states of Iceland, across multiple countries in Europe. market of their electricity load. Lichtenstein and Norway. Physical PPA: A PPA where there is Corporate buyer: The buyer of Guarantee of origin (GO): a physical grid network connection electricity in a PPA (also referred The name for Energy Attribute between the generation asset and to as an offtaker, energy buyer or Certificates commonly used in the load of the corporate buyer, power consumer) Europe. where the electricity delivered under the PPA is sleeved through an Corporate renewable PPA: A Independent power producer energy service provider. Also known contract between the corporate (IPP): An entity that is not a public as a direct or sleeved PPA. buyer(s) and the power producer utility but that owns facilities to (developer, independent power generate electric power for sale to Power purchase agreement producer, investor) to purchase utilities and end users. (PPA): A contract between a power renewable electricity at a pre- producer and a buyer of electricity agreed price for a pre-agreed Interconnector: The physical for an agreed tariff, tenor and period of time. The contract power line that allows the exchange capacity. contains the commercial terms of of electricity between two the electricity sale: contract length, neighboring markets. Tariff: The cost per unit of electricity that a buyer pays. point of delivery, delivery date/ Interconnector capacity rights: times, volume, price and product. The right to transmit a specified Virtual PPA: A financially settled Energy Attribute Certificate volume of electricity across an PPA, where a physical network (EAC): A certificate that verifies interconnector from one electricity connection between the generation that 1 MWh of renewable electricity market to another. asset(s) and the operational load was produced and added to the is not required. Also known as a electricity grid. financial or synthetic PPA.

Cross-border renewable PPAs in Europe: An overview for corporate buyers 38 Acknowledgements About WBCSD’s REscale About the World initiative Business Council This report was written by WBCSD for Sustainable with support from the contributing REscale brings together leading Development (WBCSD) authors listed below and members companies representing the full of the WBCSD Corporate renewable electricity value chain WBCSD is a global, CEO-led Renewable PPA Forum. The report to accelerate deployment of organization of over 200 leading has been prepared for general renewables and the transition to businesses working together informational purposes only and a low-carbon electricity system. to accelerate the transition to a is not intended to be relied upon REscale members share the sustainable world. We help make as accounting, tax, legal or other ambition to scale up renewable our member companies more professional advice. We thank the deployment beyond average growth. successful and sustainable by following contributing authors: focusing on the maximum positive This report builds on previous impact for shareholders, the • Peter Swank, James Lewis, WBCSD reports on corporate environment and societies. Fatima Sanchez and Ally power purchase agreements: Charlton, Schneider Electric Corporate Renewable Power Our member companies come Energy & Sustainability Services Purchase Agreements: Scaling up from all business sectors and all • Andrew Hedges, Norton Rose globally (October 2016), Innovation major economies, representing a Fulbright in Power Purchase Agreement combined revenue of more than • Jørgen Bjørndalen, DNV GL Structures (March 2018) and How USD $8.5 trillion and 19 million Multi-Technology PPA Structures employees. Our global network • Adam White, Director, RECS Could Help Companies Reduce of almost 70 national business International Risk (March 2019). The platform councils gives our members And we thank the following individuals undertaking this work is called the unparalleled reach across the globe. for contributing a project case study: Corporate Renewable PPA Forum. WBCSD is uniquely positioned to work with member companies To find out more about REscale, the • Moritz Bernhoerster, AB InBev along and across value chains Corporate Renewable PPA Forum • Sim van der Linde, Royal DSM to deliver impactful business and previous reports, visit our solutions to the most challenging • Mark Scoffin, Novartis webpage or contact: sustainability issues. • Simon Braaksma, Philips Lucy Hunt • Bas Lubach, HEINEKEN Together, we are the leading voice Manager, Energy of business for sustainability: united [email protected] by our vision of a world where more than 9 billion people are all living well Disclaimer Mariana Heinrich Director, Energy and within the boundaries of our [email protected] planet, by 2050. This publication is released in the name of the World Business Council This report has been produced in www.wbcsd.org for Sustainable Development collaboration with the RE-Source Follow us on Twitter and LinkedIn (WBCSD). This document is the Platform, Europe’s leading forum result of a collaborative effort for corporate renewable energy between WBCSD, contributing sourcing. The RE-Source Platform authors and representatives from seeks to remove barriers for companies participating in the companies to procure renewable Corporate Renewable PPA Forum. electricity by opening markets, A range of WBCSD members raising awareness through its Copyright reviewed the material, thereby Buyers' Toolkit and connecting Copyright © WBCSD, December 2020. ensuring that the document broadly corporate renewable energy buyers represents the majority view of the and sellers. Corporate Renewable PPA Forum. It does not mean, however, that every company within the Forum agrees with every word.

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