Power Purchase Agreements (Part 1): Market Map

Over the last 12 months, the UK solar market has seen an explosion of interest and activity in Corporate Power Purchase Agreements. This activity has notably been driven by several utility-scale infrastructure funds allocating capital towards ‘decentralised’ solar funds. In this series on PPAs, we'll cover everything you need to know from negotiation points, pricing dynamics and documentation. In this first post in the series, we’ll explore what a corporate PPA is, who they benefit, and what players are active in the UK market today.

What is a Corporate Power Purchase Agreement (PPA)?

At its core, a Power Purchase Agreement is a contract between an energy asset owner and an energy buyer (‘offtaker’). Originally PPAs were between utility-scale developers and utilities. However, in recent years, they have become an attractive way for companies to finance the installation of an on-site solar system.

In Corporate PPAs, businesses lease out their roof to a third-party developer (typically infrastructure investors, installers or landlords) who will fund, install and maintain the solar system. In exchange, the developer sells the generated energy to the business on-site at a predetermined price for a period of time typically between 10 and 25 years. This is priced per kWh - just like a traditional energy tariff - and should be set lower than the current market rate for electricity.

What are the Benefits of PPAs?  

• Zero upfront costs: The developer covers all installation costs.

• Immediate savings: Solar electricity is purchased from the developer at a lower rate. initially than your current provider which yields immediate savings on your electricity bill.

• Reduced emissions: from the purchase of clean electricity.

• No maintenance costs: The PPA includes a long-term operation and maintenance contract, as well as insurance, which are all covered by the developer.

• Transferable: If you move premises, the PPA could be transferred to the new occupants.

• Hedge Future Energy Prices: by locking in a low cost of electricity at a pre-agreed inflation rate, PPAs provide businesses with long-term stability and predictability on energy prices.

Who Are PPAs Ideal for?  

A PPA is ideal for businesses that:

• Own their premises or have a long-term lease.

• Have at least 300m² of roof space to accommodate a system of 50kWp (approximately 100 panels) or more.

• Have moderate to high electricity usage, particularly during the day.

• Have a good credit rating and a sustainable long-term outlook.

What are the Key Players in the PPA Market?

Finance Providers

PPA finance providers play a crucial role in the market through capital provision. Finance providers will work closely with market participants such as project developers and installers to finance projects but tend not to own the project design, paperwork or installation processes directly. Instead, their core competence is in due diligence of the customer and project proposal to generate a PPA price and financing offer. Finance providers may also originate more financing opportunities by offering solar feasibility tools and assessments to their customers.

Developers/ Installers

Project developers/ installers are sector specialists in commercial solar. They often have both technical and ‘on-the-ground’ capability in-house which means they can own the whole process end-to-end. As well as being a ‘one-stop-shop’ offering, their sector expertise also yields a competitive advantage in system design and execution of paperwork, a stage at which many projects slow or fall down. 

Real Estate

A number of large real estate owners are looking to leverage unused roof space to generate extra revenue and EPC improvements through a solar PPA. Real estate funds are well positioned to capture market share in this space because they benefit from existing relationships with ‘customers’ (ie. their occupants) and healthy negotiating power on the lease should adjustments need to be made.

Conclusion

In the past year, the UK solar market has seen significant growth in Corporate Power Purchase Agreements (PPAs). This growth in Corporate PPAs signposts a broader market trend of clean energy procurement by UK businesses to hit ESG target and indicates that on-site, smaller-scale solar could contribute significantly to the UK's energy mix in future. The PPA market is fast growing also because PPAs create mutually beneficial collaborations between energy investors and buyers: the former deploys capital in decentralised energy yielding a steady, long-term return and the latter benefits from clean, cheap energy at no upfront cost.

Want to hear more about how Metris can scale your PPA fund? Book a call with our team.