Greening your power supply: How should corporates approach power procurement?

Hugo Lidbetter, head of sustainable infrastructure, and Deborah Harvey, head of energy innovation, at law firm Osborne Clark discuss the options for corporate buyers of green power, including the emergence of “virtual” power purchase agreements.  

The procurement drivers for corporate purchasers of power have changed significantly over the last decade. Price, although key, is no longer the sole dominant consideration. Corporates are now increasingly driven by sustainability criteria, spearheaded by, but by no means confined to, those forming part of the RE100. But what options are there for a corporate reviewing its power procurement strategy and what should be considered when evaluating the options?

Green tariffs

The most straightforward option for a corporate purchaser is to select a ‘green’ energy tariff from its licensed supplier. Green tariffs are simple in concept, simple in execution and murky in practice. On the one hand, a supplier may (sometimes for a tariff premium) guarantee that it procures its power exclusively from renewable assets. This gives the corporate customer a high degree of certainty that the power corresponds (in volume terms at least) to actual renewable power, without incurring the additional cost or resource time of implementing the more bespoke contractual arrangements outlined below.

However, the licensed supplier may have a mixed portfolio of generation sources (some green, some not) and rely on ‘greening’ the total supply through the purchase of REGOs (certificates issued in respect of power generated from renewable sources to verify the renewable status of that power). Although REGOs can only be issued for renewable power, they do not need to remain associated with that power over its lifecycle. This means that their value as a proxy or guarantee of renewable power becomes eroded the moment they are traded.

The erosion arises, in part, because the holder of a REGO (having bought it from the generator) cannot be certain that the generator or the purchaser of the renewable power supply is not making the same claim as to the ‘greenness’ of that power. This reflects the problem of double accounting that the same carbon benefit claim is made twice in respect of the same megawatt of green power.

A second shortcoming with green tariffs is that it is very hard to be certain that the power behind that tariff satisfied the test of ‘additionality’. This principle requires that a particular renewable asset would not having been developed but for the willingness of that purchaser to contract with the developer of the asset. The problem arises particularly for green tariffs as they are not pre-purchased – in almost every case the asset has already been built and so the purchaser must instead satisfy itself that its purchase of that green tariff has helped in some less certain way to support the development of that asset.

So, green tariffs are undoubtedly helpful, particularly when used as part of a combined procurement approach, but they carry with them some very real limitations; and a failure to take those seriously and think critically could otherwise expose a well-intended corporate customer to greenwashing claims.

From market place to market stall: contracting with the seller

An awareness of the shortcomings of green energy tariffs has motivated larger corporate buyers to contract directly with renewable generators. The most common way of doing this is by entering into a corporate power purchase agreement (CPPA). A CPPA is an evolution of a standard power purchase agreement, under which a licensed electricity supplier contracts with a renewable generator to purchase the power from a renewable asset. The utility would then trade that power on the wholesale market or supply it to its own corporate buyers under its green supply tariffs.

A CPPA differs from a ‘vanilla’ PPA in one key respect: a corporate buyer is not licensed and so not able to physically accept delivery of the renewable power at the site’s connection point to the electricity network. Instead, it must arrange for a licensed supplier (most likely its existing licensed supplier) to accept delivery on its behalf and transport that power across the network. The supplier then accounts to the corporate buyer for the volume it has accepted from the generator by re-delivering it at the buyer’s premises or by simply crediting an equivalent volume to the buyer’s energy account. This is referred to as physically ‘sleeving’ the power on the corporate buyer’s behalf.

CPPAs are complex to put in place, certainly comparatively to a green supply contract, but present two particular advantages to a corporate buyer. Firstly, price certainty; the CPPA will typically be priced on a fixed £/MWh basis for the duration of the term, which may be 10-15 years. In view of the recent price volatility in our energy market following the invasion of Ukraine, price certainty is a very attractive feature in itself to both the corporate buyer and the generator selling the power.

Secondly, but equally as important, is the role of the CPPA in the corporate buyer’s ESG commitments and decarbonisation strategies. A CPPA, being a contract for volume directly with a renewable asset, allows the corporate buyer to confidently claim that the associated power is green and it will generally purchase the accompanying REGOs to ensure this. A related, or perhaps a supporting advantage, is that the CPPA will include various branding or publicity provisions – which will relate to the nature and extent of the buyer’s ability to make announcements about a particular renewable asset and possibly extend to branding rights.

Going virtual: the virtual market stall

What if the corporate buyer could secure most of the advantages of a CPPA without the complication of engaging a licensed supplier to physically sleeve the power? This is the challenge that has resulted in recent interest in ‘virtual PPAs’ in the UK market. A virtual PPA (VPPA) is in many respects very similar to a CPPA as there is still a corporate buyer and a renewable generator seller. The key difference is that the VPPA dispenses with the physical sleeving of the power, because title to power is not transferred to the corporate under the arrangement.

This makes the arrangements (at least in respect of their logistical aspects) much simpler. It does not dispense with the delivery issue entirely though, as instead of the corporate buyer entering into a sleeving arrangement with a licensed supplier, the generator needs to enter into a ‘route-to-market’ PPA (RtM PPA) with a licensed supplier as that power still has to be accepted at the site’s connection point. Generators are very used to doing this so from a corporate buyer’s perspective, the VPPA looks much simpler.

The whole point of a VPPA, once you’ve cut out delivery of power, is to secure a deal on price. The VPPA works much like a private Contract for Difference arrangement. The generator and the corporate will agree a fixed strike price that they are willing to sell and purchase respectively power for the term of the PPA. This operates differently to the CPPA’s fixed £/MWh price which is typically indexed over the term and just reflects a sell/buy price.

The strike price under a VPPA is compared against the actual market price regularly over its term. When the market price is higher than the strike price, the generator pays the difference to the buyer. When the market price is lower than the strike price, the buyer pays the difference to the generator. This ensures that both parties are actually selling and buying at the strike price, even though no power changes hands. Of course, the price they are actually paying is determined for the generator under its RtM PPA and for the buyer under its supply agreement with its licensed supplier.

Because the power from the renewable asset is being sold by the generator under its RtM PPA and the power consumed by the corporate buyer is coming from its licensed supplier, the parties to a VPPA will need to think carefully about the environmental claims they make about that power. Power purchased from a licensed supplier doesn’t de facto become green just because the corporate buyer has a VPPA with a renewable generator, highlighting the importance of viewing these arrangements in the round and the role of a multifaceted approach to procurement.

A building momentum?

Green tariffs have been increasingly scrutinised to determine how their environmental claims stack-up (they have been the primary focus of greenwashing claims for a while now). Although the CPPA is not a new concept in the UK and the VPPA has been popular in other jurisdictions for some time, the advantages of price certainty and environmental robustness that these structures present have become increasingly relevant, accounting for the surge in their popularity in the UK. We see these being a key part of a corporate purchaser’s toolkit in delivering on its decarbonisation and net zero targets, and when structured correctly, can also offer real benefits for renewable generators.