For the past 10 years, global corporations have benefitted from increasingly affordable renewable electricity options across many world markets. While the U.S. market has been the most open and mature to date—offering corporations competitive energy prices in utility-scale, long-term power purchase agreements (PPAs) in addition to traditional onsite solutions—the European market sees increasing opportunity.
That said, we see ongoing skepticism from some commercial and industrial (C&I) customers as to the economic attractiveness of renewable energy in Europe. Furthermore, we hear companies in Europe who have set renewable procurement goals express their struggle to make progress when renewables are limited or unavailable in key operating geographies.
On the road to a solution
In many ways, Europe’s market today is where the U.S. PPA market was in 2015 – on the verge of taking over, but still requiring some convincing and education. Companies in sectors as varied as automotive manufacturing, retailer, heavy industrial, consumer goods and telecom are signing PPAs across markets including Spain, UK, Netherlands, Finland, Poland and Ireland. Collaborative PPA models are opening the market to smaller companies and buyers with less energy demand.PPAs are not the exclusive realm of the larger tech companies as some still suspect. And renewable energy can now make companies money – not cost more.
European companies will be most familiar with sourcing renewable energy via green tariff, Guarantee of Origin (GO), or Renewable Energy Guarantee of Origin (REGO). Many companies may also be familiar with a direct delivery PPA structure, or DPPA.
The virtual power purchase agreement, or VPPA, model is emerging throughout Europe as a viable solution to cross-border limitations in a DPPA. VPPAs provide some advantages over DPPAs and may be used by buyers to meet multiple environmental and economic goals, even across European geographies.
How PPAs work
In a PPA, the purchasing company (offtaker) contracts directly with a project developer or owner to secure renewable energy. In a DPPA structure, the offtaker and developer share a grid that enables the physical delivery of purchased power via a 3rd party market provider, such as a utility. In a VPPA structure the offtaker contracts directly for fixed-price renewable energy with the developer, however the offtaker does not take physical delivery of the power. The physical power is sold back onto the grid on the spot market to be used by any number of end users.
In both cases, the offtaking company contracts for a fixed price for power, and, typically, the associated EACs (Energy Attribute Certificates, or GOs in Europe) generated by the project. In a region seeing increasing energy prices (think of the >30% price hikes in Poland in 2018, or the fact wholesale prices hit > €70 per MWh in Spain this summer) and the fixed price benefits of a PPA are clear. In a DPPA, the fixed price for power may be leveraged as a financial hedge against volatile conventional power prices in the market in which it is contracted. In a VPPA, the associated EACs from the project may be attributed across the company’s European load to meet environmental goals like carbon reduction or renewable electricity acquisition.
The predominant advantage of the VPPA is the opportunity for companies to aggregate smaller energy loads under a single, pan-European project umbrella. In this model, the GOs or REGOs obtained from the VPPA can be allocated to aggregated European electricity consumption. For example, if a company with operations in multiple European countries executes a VPPA in Spain, the GOs from the Spanish project may be cancelled on behalf of the consumption in all countries.
As a result, corporate offtakers can go country-by-country to identify the best renewable energy projects at the best price, knowing that the EACs from the project can be applied across operational sites.
The validity of the pan-European PPA approach
Corporate offtakers may be wary of this outside the box VPPA approach to address pan-European environmental goals. However, leading NGOs support its validity:
- Recent GHG Protocol Scope 2 guidance from the World Resources Institute (WRI) has clarified that EACs may be purchased and used across an interconnected grid region. This means that EACs obtained from one part of the European grid may be applied elsewhere in the European grid—a standard practice in carbon reporting.
- This practice is consistent with RECS International’s Renewables Good Practice guidance, which stipulates that “by limiting procurement to current grid connected areas, market-driven incentives are inevitably limited in their potential ability to include cost-effective areas for renewables production. Market areas should be as large as possible and interconnection should not be a necessary prerequisite for renewables procurement in all cases.”
- RE100 reporting is consistent with the GHG Protocol guidance. Claims must be made in the same market where both load (location-basis) and purchase of the EACs (market-basis) occur, and Europe is treated as a single market.
Both DPPA and VPPA contracts require consideration, as they have risk, financial, and accounting implications. However, for those European companies that successfully navigate these issues, PPAs of both types are helping them achieve their environmental and economic goals.
To compare side-by-side the considerations for each available structure and to learn more about the best markets for PPAs in Europe, download our European PPA Opportunity Update.
For an overview of the key differences between DPPAs and VPPAs, read our summary.
Contributed by: James Lewis, Client Development Manager, International Sales, Schneider Electric Energy & Sustainability Services