Ideas & Debate
Corporate PPAs: New buzzword for power solutions in East Africa?Tuesday April 06 2021
Force Majeure was one of the biggest concepts up for discussion in 2020. In 2021, the term ‘corporate PPA’ is earning its pride of place as one of the new buzzwords for the energy sector in the region, with players looking at how these arrangements could be used to address some of the cost and supply challenges facing the region.
In the energy sector, PPA stands for ‘power purchase agreement’, which is an offtake agreement where the Offtaker or buyer (say Kenya Power or The Uganda Electricity Transmission Company Limited) agrees to buy electricity from a power generating firm, typically at an agreed price for a fixed term. Where a ‘utility’ like Kenya Power is the buyer, it is known as a utility PPA.
It follows then, that a corporate PPA is an agreement where a corporate entity buys electricity from a power generating entity. Corporate PPA-type arrangements can take different forms and are often not as straightforward as utility PPAs. We look into some of these arrangements in this article.
First, a private wire or direct wire PPA. This may be the more familiar arrangement and involves the corporate entity purchasing power directly from the generating company. This could include an arrangement where the power generation plant is located on the corporate’s premises, for example, in the form of solar rooftop panels.
The power generating company instals and operates the system, delivering the power to the corporate buyer. These systems are commonly used where corporate headquarters have substantial power needs, space and available energy resource. The co-location of the generation plant and the corporate itself avoids the need for use of an external transmission network, and therefore the utility company is not involved.
Second, a physical or sleeved PPA. Here, a PPA still exists between the corporate and the power producer. However, once the producer has generated the power, it must use the utility’s transmission or distribution network to transport it to the corporate. The corporate enters into a supply agreement with the utility and pay a ‘sleeving’ fee for the transmission of the generated power. This arrangement may be appropriate where there is no potential for co-location of the generation plant, or where the power producer services more than one corporate from its plant.
The corporate is typically also able to specify what type of power they want, for example, only renewable power, which can assist in meeting corporate environmental targets without the substantial capital outlay associated with a direct wire PPA.
Third, a synthetic or virtual PPA. Most commonly this is an arrangement with three aspects, used in regions where there is an open power market. First, there is the ‘synthetic PPA’ between the corporate and the power producer whereby those parties agree on a ‘strike price’ for power sold under their arrangement. Then, under a PPA arrangement, the power producer sells to the open market at the ‘market price’. Finally, the corporate, via a supply agreement, purchases power from the open market (again at ‘market’ rates).
The extra aspect here is that once the power is purchased, the corporate and the generator make an adjustment for the difference between the price to the power producer by the utility and the ‘strike price’ which is fixed in the synthetic PPA. If the market price paid is lower than the strike price, the adjustment will be in favour of the power producer. If the market price is higher than the strike price, the adjustment will be in favour of the corporate. Such PPAs, therefore, act as a financial instrument.
Each arrangement has distinct advantages. All of the types discussed above give a corporate control over the type of energy it uses, enabling it to prioritise the use of renewable energy and meet corporate social responsibility goals.
Direct wire PPAs may also make electricity available where a utility is unable to provide reliable power, for example, in remote locations.
A good example would be the many remote lodges in East Africa, which have invested in solar panels to reduce reliance on costly generators. Depending on the applicable legal framework, a direct wire PPA may also create an opportunity for generating revenue. Where power produced by a direct wire plant is more than the corporate’s needs, it may be sold back to the national grid for resale to other consumers.
Depending on the arrangement used, a corporate PPA may also provide more cost certainty than using a state-owned utility.
A sleeved or direct wire PPA will allow the corporate to fix the applicable tariff for an extended term, reducing the impact of potential price increases which may apply to power purchased from a Utility.
This can be an appealing prospect for corporates who need long term price certainty.