Clean energy procurement: Key considerations

What are you doing about energy procurement this year? Have you considered the role that power purchase agreements can play in helping you further your sustainability agenda?

Whether you are a housing developer or a housing association with a large housing stock under management or you own or occupy significant corporate premises, it is likely that the following items are high on your priority list:

• Reduction of electricity costs for tenants, occupants and your existing corporate premises.
• Long-term pricing certainty.
• Procurement of green electricity.

This article explains what a power purchase agreement is, the benefits of considering one as part of your energy procurement strategy and the key considerations when initiating discussions with potential generators.

What is a power purchase agreement ('PPA')?

In its simplest form, it is a bilaterally negotiated contract between the owner of a renewable energy project (for instance a rooftop solar array) ("generator") and a housing developer or a housing association ("offtaker") for the sale and purchase of electricity generated by the project. Each MW of electricity sold will be accompanied by a Renewable Energy Guarantee of Origin ('REGO'), which will, often, be transferred to the offtaker as part of the overall PPA transaction.

What are the benefits of a PPA?

These arrangements offer:

Long-term pricing certainty: The term of a PPA typically exceeds 20 years, thus shielding an offtaker from the volatility that electricity markets have experienced in recent years.

Supports an organisation's sustainability agenda: Where the renewable energy project is in close proximity to the premises being supplied, and the electricity is supplied through cables that connect the renewable energy project directly to the premises ('private wire'), you can physically point to the relevant project in support of a claim that the electricity supplied has come from a renewable energy source. Even where a private wire arrangement is not possible, the transfer of REGOs from the generator to the offtaker (via an intermediary energy supplier) ('sleeved PPA'), serves as evidence of the provenance of the electricity supplied.

Alternative to 'home-grown' energy: Where it is not possible for an organisation to own and operate its own renewable energy project (due to lack of available space or expertise), a PPA offers an alternative.

What to think about when considering a PPA?

This is not an exhaustive list of items that need to be considered when embarking in discussions with potential generators, but rather some key items that need to be considered at the outset and which ought to feature on any heads of terms or similar initial agreement between the parties:

Structure

• Is a private wire arrangement possible? This would be the case for instance if a solar pv generator were to install solar pv panels on the roof of a multi-tenanted property, with the electricity then supplied to the property.

• If not, would a sleeved arrangement be possible? Such arrangements are more complex and involve a third-party licenced supplier, which may be the offtaker's existing licensed supplier or a different party. Due to their complexity, such arrangements would be more justifiable where there was a significant volume of electricity that needed to be procured.

• Where is electricity going to be supplied? Is electricity being supplied to a single building and then consumed by the tenants at this building? We often encounter structures, where the offtaker is buying electricity from a project with the intention to then 'transfer' this electricity for consumption at multiple premises. Depending on the precise set-up, different regulatory issues arise.

Contracting parties

The renewable energy sector has seen many new entrants in the past few years. It is not uncommon for generators to enter into a PPA with an offtaker and subcontract all works associated with the project to a third party. For an offtaker having a clear understanding of its immediate contracting party and the wider supply chain will be key.

The energy supplied by a particular project will not just depend on weather conditions but also on how well a project has been constructed. In addition, the supply chain needs to be able to stand up to any rigorous scrutiny dictated by the offtaker's sustainability policies.

Price

• As mentioned earlier, the expectation is that the REGOs generated by a project will be transferred to the offtaker as part of the PPA transaction. In some instances, REGOs are included within the price payable for the electricity consumed. However, this is not always the case. The price of REGOs has been increasing for quite some time (although market participants are noting signs of this stabilising now)  and as such there are good reasons why a generator may wish to hold on to these and trade them in the open market. Clarity over what is and what isn't included in the price will be key.

• Certainty vs flexibility: After a period of volatility, it would appear that electricity prices are going to enter a period of stability. A PPA can offer pricing certainty over a lengthy period of time (as the price payable for electricity under a PPA will be lower than the price that the offtaker is paying for electricity from its incumbent supplier at the relevant point in time).

That said, it is possible that in the future electricity prices will reduce further, resulting in a situation where the price payable under a PPA is higher than the price that the offtaker would have been able to secure in the market.

Due to this uncertainty around electricity pricing, it is important for interested parties to engage with external consultants as early as possible in the process, so that they can make an informed decision on the price that the generator is offering. Additionally, the inclusion of a contractual mechanism that allows the price to 'flex', would alleviate concerns around price fluctuation to some extent.

Rights granted

Consideration needs to be given to the rights that the offtaker needs to grant to the generator to enable them to install, connect, maintain and decommission the project and supply electricity from the same to the offtaker. Such considerations will be relevant for those projects that involve a private wire. The nature of the rights granted differs depending on the nature of the project, the location of the point of electricity supply and other technical parameters.

For example, where solar pv panels are installed on the roof of a multi-tenanted building, the generator will need rights to access the roof to install the panels and subsequently clean and maintain these, as well as rights to access the common areas of the building to install any necessary cabling and associated infrastructure. It may also be necessary for scaffolding to be installed at the building for the period of the installation and rights to park vehicles and store equipment (where the project is intended to take some time to complete).

Having a clear understanding of what may be required for a particular project and the extent to which any necessary activities could interfere with or cause disruption to the activities in a particular location, will be key in ensuring the smooth completion of a proposed project.

Risks

Risk is inherent in any contractual arrangement. The nature of the risks and potential liabilities to which an offtaker is exposed under a PPA differs depending on whether there is a private wire arrangement or a sleeved arrangement.

Because sleeved PPAs involve at least one other party (in addition to the generator and the offtaker) they require consideration and alignment of terms between multiple contracts and could create additional risk for an offtaker.

On the contrary in a private wire PPA, it easier to clearly identify (and quantify) the risks that are attributable to the two contracting parties (i.e. the offtaker and the generator).

What next?

The Government published its "Clean Power 2030 Action Plan: A new era of clean electricity" on 13 December 2024. This defines in some detail the amount of electricity generation that will be required between now and 2030 (initially) and the areas where such generation needs to be located. The plan also defines, albeit in less detailed fashion what will be required between 2030 and 2035 and in both instances it makes it clear that additional, renewable energy generation (including in the form of solar and onshore wind) will be required to achieve the Government's decarbonisation agenda.

With an increase in renewable energy projects comes more choice and more opportunities for offtakers, such as housing developers and housing associations to consider their procurement strategy and available opportunities in the PPA space.

Foot Anstey has considerable experience advising on private wire and sleeved PPAs and has provided training to various organisations looking to enter into such arrangements. If there is a specific project you wish to explore or you would like to discuss the provision of training, please do get in touch with a member of the team below.