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Monday 17/09 – a Motion Is Passed at the Liberal Democrat Conference for the Government to Improve Housing Standards and Reduc Tom Crisp Editor 01603 604421 [email protected] Monday 17/09 – A motion is passed at the Liberal Democrat conference for the government to improve housing standards and ENERGY PERSPECTIVE 02 reduce fuel poverty. Ofgem affirms its position that its work on market- wide settlement reform should not include centralisation of supplier Steady as she goes: the rise of agent functions, and that it is considering whether aggregated data corporate PPAs – Ben Hall should be provided into central settlement systems at all. POLICY 05 RenewableUK celebrates the UK surpassing 20GW of wind generation capacity. Summit brings welcome progress on UK’s EV transition Tuesday 18/09 – Chinese nuclear energy company CNG says that Adam Smith Institute warns of negative consequences of price “political sensitivities” could lead to it giving up the chance to operate caps its planned Bradwell power station in Essex. OVO Energy announces Royal Society and RAE detail that it has taken control of German energy provider 4hundred. A 50% how UK can hit net zero carbon stake in the Hornsea 1 offshore windfarm is sold by Ørsted to Global REGULATION 10 Infrastructure Partners for £4.46bn. Media reports indicate Birmingham City Council could drop plans to establish its own energy supply Balancing charges up for review company. Five-year review of transmission charges suggests 20% increase Wednesday 19/09 –Energy and Clean Growth Minister Claire Perry in revenues Ofgem takes forward gives Hydraulic Fracturing Consent to shale gas operator Cuadrilla for competition in transmission its second well at its Preston New Road site in Lancashire. The infrastructure Treasury awards £36mn to a consortium led by Swansea University to Ofgem: supplier agents should develop building materials that generate energy. Green Star Energy not be centralised pays over £675,000 in compensation after mis-selling and annual INDUSTRY STRUCTURE 16 statement failures. Retail tariff strategies diversify Thursday 20/09 – BEIS data shows that non-domestic Renewable amid rising prices Heat Incentive deployment during the month was “much lower than UKERC warns current gas security metric insufficient the average” for the prior 12 months. Official figures also show the number of Energy Company Obligation measures installed in July was NUTWOOD 20 11% lower than in June. Ofgem issues its statutory consultation on Lessons from time of use legacy domestic customer communications, including a continued move away tariffs must be learnt – Rajni from prescriptive based rules to narrow principles. Policy Exchange Nair, Citizen’s Advice recommends reforms to encourage the uptake of the hydrogen Red alert: SSE’s latest profit warning – Peter Atherton economy. Gore Street acquires two battery storage projects from Origami Energy, taking its portfolio to 29MW across four projects. MARKETS 22 Friday 21/09 – Martin Cave is confirmed as Chair of Ofgem. Citizens Advice releases research comparing historic time of use tariffs and the implications for the move to the smarter energy system. Oil prices fall to below $70/ barrel amid reports OPEC is considering boosting coordinated output levels ahead of US sanctions against Tehran. Energy Spectrum 635 | 24/09/2018 | page 1 We have written recently subsidies, has the ability to provide two key (ES623) on the potential features for the developer: a long-term route to for a floor price Contract market with wholesale price certainty and a buyer for Difference (CfD) to with a strong credit rating. The combination of provide a route to these can help to provide comfort to financiers. market for new build Cross currents onshore renewables. An alternative, and already The interest in CPPAs from developers is Ben Hall Associate Director active option to provide significant, especially for onshore wind and solar 01603 604405 some wholesale price PV, now excluded from the CfD auctions at least b.hall@cornwall- stability is through a for the time being. Many developers are viewing insight.com direct power purchase these contracts as the only route to market for agreement (PPA) with a creditworthy end user. It is subsidy-free renewables. The enticement of a sometimes known as a corporate PPA (CPPA) or long-term, potentially fixed price contract with a “long-term sleeve”. financially strong counterparty could also lead to lower cost of capital. The CPPA has been gaining traction recently as developers explore creative solutions to reducing The buyers tend to be Fortune 500, blue-chip firms subsidies. A recent example is provided by with large electricity usage. They range from banks EnergieKontor’s subsidy-free onshore wind to tech companies, supermarket chains and large developments in Scotland (Withernwick 2) and manufacturing processes. In the UK, those with England (Pines Burn), over which it is in advanced active CPPAs include BT, HSBC, M&S and Mars negotiation with a major international company as (see Figure 1). We estimate over 400MW of a potential partner. renewables capacity is now under CPPAs, representing a small (<2% of the total PPA market) This week’s Energy Perspective focuses on some but growing segment. This compares with the US, of the recent activity in this area, including the which had 2.8GW of CPPAs in 2017, according to a drivers from the end user and developer, and recent report by Baker McKenzie. trends in contract structuring and price setting. Figure 1: Examples of UK CPPAs Gulf stream The traditional route to market to sell power for Developer Technology Capacity Buyer developers is through a PPA with a licensed EDF Onshore wind 72MW BT electricity supplier. For a project built using project finance, these contracts are typically 10-15 years Baywa Solar PV 15MW McDonalds and may contain a floor price. However, they do not tend to provide long-term price stability as the BSR Solar PV 61MW HSBC output will be paid against a market reference Pennant Onshore wind 23MW BT price (e.g. hourly day-ahead N2EX), and therefore Walters the price achieved can vary hour-by-hour of Shanks/ generation. Increasingly, suppliers are willing to AD 4MW M&S offer fixed prices for periods within the PPAs, but Future Biogas this is usually for no more than three to five years. Eneco Onshore wind 60MW Mars The floor price does bring some comfort, but they Source: Cornwall Insight are often in the range of £10-20/MWh and The motivations for these end users are well- therefore unlikely to provide full confidence of aligned with developers. Large corporates are revenue stability. This merchant route therefore increasingly interested in these due to corporate does not suit many developers, especially in the social responsibility, which can range from absence of subsidies. company-specific policies for renewables and Whilst not a new route to market – with the first emissions targets, to pressure from investors/ contracts in the UK signed over a decade ago – shareholders and even from the supply chain in the CPPA is increasingly prominent as developers which they operate. There are now 144 major attempt to bring new projects to market without companies, many of which have a UK foot-print, subsidy. At a high-level, a CPPA, in the absence of committed to going “100% renewable” through the Energy Spectrum 635 | 24/09/2018 | page 2 f RE100 – a global initiative set up by the Climate registering the meter, dealing with settlement and Group and the Carbon Disclosure Project. managing the differences in generation and consumption. It will also include the transfer of The other key drivers for buyers are locking in Renewable Guarantee of Origins for the end user/ predictable wholesale power prices and ensuring supplier to use in the Fuel Mix Disclosure process. security of supply over the long term. To date this has been difficult to arrange through agreements Rigging with the off-taker/ supplier sector. Once a structure has been agreed, much of the From the corporate’s perspective, it will help bring focus between the developer and buyer will be on through new renewable developments without the key terms of the contract. Length of agreement having to make an upfront capital investment. It and pricing are the main focuses. also provides greater cost certainty, especially For project financing of a new asset, an absolute following high levels of volatility in a market where minimum of 10 years will be required, though this is energy suppliers have, unsurprisingly, been more likely to be 15+ years from most lenders. This reluctant to provide extended tenor contracts. is a big ask for the buyer, but we are aware of Top sails time-spans of up to 25 years in some discussions. For existing projects, the contract length may be Various structures and terms are evolving. in the much shorter as there may be less requirement for UK; these have focused on a tri-party deal where long-term stability if some of the debt has been there is a PPA between the corporate and repaid. Given that the supplier PPA market developer, a PPA between the corporate and the currently offers up to three to five years of price supplier and sleeving agreements between all fixing, we would expect some interest in this space three parties. The contracts will include the for five to 10-year sleeving deals. headline wholesale price terms agreed between the corporate and the developer. The sleeving There are various pricing options, but the principal agreement will include the costs for managing objective is a fixed price contract beyond the liquid shape (or profile) and volume variations between wholesale trading horizon between the developer output and consumption. and consumer. An alternative which has proven popular in other Prices can be set: jurisdictions, such as the US where there are tax for an initial period at a constant level, then breaks for CPPAs, is the synthetic or indirect PPA.
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