On 15 July, Microsoft Corporation announced its biggest power purchasing agreement to date buying up all 175MW of output from an Illinois wind farm for a 20 year period. EDF owns a 96% stake in the farm which is located just south of Chicago.
This is by no means the first direct power purchase agreement on such a scale to be struck in the US, where Google started a trend in 2010 by buying a large proportion of the energy output from an Iowa-based wind farm operator.
Other large corporates including Apple, Facebook, Ikea, Microsoft, and Walmart have followed suit – also directly investing in renewable project to become co-owners of renewable energy generation assets – mostly wind and some solar.
Google now uses around 737 million kilowatt-hours of green power per year but is far from the top green power partner in the US Environmental Protection Agency’s rankings. Intel holds the crown.
Direct PPAs in the UK
Of course PPAs generally are nothing new.
Many energy providers in the UK offer PPAs to business customers who want to gain more visibility of their energy cost across an extended period.
What’s different about the types of deals struck by Google and its ilk are their size, length of commitment and level of specification about the exact sources of renewable energy which are associated with the contract.
These kinds of deals are not usual in the UK energy landscape – or not yet.
In June communications giant BT became the first large corporate to strike a direct PPA of a comparable scale and significance to the Google-type agreement.
In a series of deals worth £440m, BT has secured energy output over fifteen years from three UK wind farms including Fallago Rig in Scotland, Mynydd Bwllfa in Wales and Heysham South in Lancashire.
The deals will help BT stick to its public commitment to reduce its reliance on fossil fuels, and to secure its long term costs. But they have also provided a fillip to the onshore wind industry.
Mynydd Bwllfa and Heysham South have both been able to use the deal to fund construction on their sites which are not yet operational.
BT says it is pleased to be connected so definitively with the three onshore wind sites.
“BT has been growing its renewable energy commitment for around 10 years,” BT’s head of energy supply Rob Williams explained to Utility Week.
“Since July 2012 we have been provided with one hundred per cent renewable electricity from our supplier. These PPAs are a natural extension of this sustainable leadership position and we are proud to have supported bringing new renewable generation to the UK.”
There are mixed feelings in and around the energy industry about why more direct PPAs of this nature have not sprung up in the UK.
Some blame renewables strike prices, others point to the Renewables Obligation and Contracts for Difference although there is disagreement about which of these makes direct PPAs more or less difficult to negotiate to the satisfaction of all parties.
It’s not that the model has been unfeasible.
Government struck a direct PPA with Air Products energy-from-waste Teeside plant last year which will purportedly save the British tax payer £97m through more efficient government energy purchasing and create around 750 jobs in the renewables sector – a boost for the low carbon economy.
The Air Products PPA will give government a fixed price for its energy for 15 years, starting in 2016. Building on this success, it is currently taking tenders for a second PPA to take account of another slice of the Crown Commercial Service’s £1.6bn annual spend on electricity and gas.
Red tape barriers
But the fact that Government was the only organisation to have pushed through to completion on a large, direct PPA before BT’s recent foray is indicative of the main stumbling block to their increasing popularity and the potential for a flurry of private sector investment in renewable energy sources.
They are deeply complex and bureaucratic deals to strike.
Wayne Mitchell, industrial and commercial markets director at Npower, BT’s renewable energy supplier, agrees that this is the case.
“It can be a long, hard slog to negotiate a deal that links a specific energy source with a specific usage or geography,” he told Utility Week.
BT’s Williams added that in the case of the Fallago Rig deal in Scotland, Npower had to create an entirely new set of market mechanisms, bespoke, in order to secure BT’s supply.
“You need to have volume of demand or else it is unlikely that the payoff will seem worth the effort and time invested,” Mitchell summed up.
On the generator side too there is red tape to be cleared before direct PPAs become more common place – and potentially more accessible to smaller players.
Currently, more usual commercial PPA deals leave balancing responsibilities with the licenced energy supplier.
Under direct PPAs the generator needs to obtain a licence from Ofgem to take on the responsibility, and risk associated with balancing themselves – or outsource the balancing requirements to a licensed party – say, one of the big six – for a fee.
Frank Gordon, policy analyst at the Renewable Energy Association says this will continue to be a deterrent for many smaller generators seeking out direct PPAs with potential local customers. He says Ofgem should do more to address the issue.
“Ofgem could make the balancing requirements a lot less onerous for smaller suppliers by, for instance, setting a cap on the amount large energy firms and other licensed balancing services providers can charge,” Gordon suggested.
“The Ofgem scheme ‘Licence Lite’ – which encourages organisations with generating assets to sell energy to local businesses, creating local energy ‘loops’ – could do this,” he continued, but although there are plenty of Licence Lite applications in progress – including those tied in to London Mayor Boris Johnson’s strategy for decentralised energy supply in a low carbon London, none of them have come to fruition yet. “It is unclear how the rules and mechanisms governing them will work,” Gordon summed up.
This halter on energy market innovation and flexibility is a poor show considering that more direct PPAs in the UK could compensate for the lack of government funding for established technologies many renewables groups complained of in the recent CfD budget.
BT’s three deals all relate to onshore wind projects which – along with solar power and a group of other ‘established’ technologies – will share a CfD pot of just £50m per year out to 2020-21, compared to a pot of £155m for less established technologies.
UK renewables missing out
Trade bodies Renewable UK and the Renewable Energy Association say firmly that they would welcome direct PPA growth in the UK as a means of motivating competition and boosting confidence and funding for renewables projects.
Meanwhile, although emphasizing that PPAs may not be right for all businesses, Npower’s Mitchell said that they will be an important part of his organisation’s portfolio of products as it moves away from commodity supply and towards energy solutions provision.
“Organisations are becoming more sophisticated in understanding the market and how they can interact with it,” he said.
“The number of mechanisms through which they can do this is increasing and we want to help customers do this in a way that works within the rules and in a way that works for their business.”
It’s part of a plan that will see Npower aim for longer term, lower margins and higher customer value rather than cashing in today and failing to embrace and benefit from the drive among business customers to cut usage he say.
So, for a forward thinking, high value energy market, less reliant on government subsidies, it is time for greater will to accelerate measures to bring liquidity into the PPA market – which government has accepted is lacking – and remove bureaucracy from deal brokering.