Coronavirus: An ill wind for corporate PPAs?

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Before coronavirus (Covid-19) forced the mass lockdown of industries across Europe, the market for corporate power purchase agreements (CPPAs) was booming. Demand for clean energy was soaring and renewable energy suppliers were in a strong position to negotiate terms with corporate buyers.

Now, following the imposition of drastic government measures to curb the spread of the virus, which has necessitated the temporary closure of offices, manufacturing plants and some transport systems, the negotiation process has slowed to a crawl at best.

Prices

While the hiatus in contract negotiations is partly due to logistical reasons, there is also a marked nervousness about CPPA pricing, following a steep decline in energy demand and the corresponding nosedive in electricity prices.

In wholesale energy markets, traditional demand patterns have also shifted as industry and members of the wider workforce change their working patterns. The consensus view is that this is just a temporary blip, and that normal patterns will resume once the pandemic abates and people return to normal working routines.

But energy pricing is notoriously difficult to predict, and it is unclear whether and how quickly prices will rebound to pre-pandemic levels.

Force majeure

Since the coronavirus crisis took hold in Europe in March 2020, most lawyers have had more discussions about force majeure clauses than they have in the whole of the past 10 years.

Force majeure is not a standalone concept in English law, and contractual performance will only be excused due to unexpected circumstances, if the relevant contract provides specifically for relief.

In U.K. contracts, there is generally a two-pronged test for invoking force majeure. The first part, whether or not there has been a force majeure event, is likely to be satisfied by the advent of coronavirus.

The more difficult issue as far as CPPAs are concerned is the second part, which is the need to prove that coronavirus has prevented performance of the affected party’s obligations under the contract.

Further compounding the issue for offtakers is the fact that most contracts, both under English and continental European laws, will expressly exclude an inability to pay or lack of funds from the definition of force majeure.

In a CPPA contract, generally speaking, the obligations are for the generator to produce electricity, and for the buyer, to take that electricity and pay for it. These obligations are not obviously affected by coronavirus.

That demand for the electricity has decreased, or that customers cannot pay for the electricity, are not directly related to these contractual obligations.

This has given rise to some complex negotiations between CPPA parties in the past few weeks, and more are likely to follow as the coronavirus situation persists.

In civil law jurisdictions across most of Central and Western Europe, there is more leeway to discuss the implications of coronavirus on parties’ ability to perform their contractual obligations in good faith.

However, there are still several questions on this matter pending resolution by lawyers and arbitrators, and it remains to be seen how this issue is dealt with in respect of CPPAs.

With the benefit of hindsight, the lesson from coronavirus is that parties should be as specific as possible in change of circumstances clauses, for CPPAs, and in all other types of contract.

Since the start of the coronavirus pandemic, there has been much greater focus on specific “corona clauses” and more detailed material adverse change (MAC) clauses, involving significant back and forth between parties on these points.

This is a broadly constructive development, if it yields contracts with provisions that mitigate damages in the short term and, in the medium term, provide mechanisms for restoring the economic balance originally envisaged at the start of the contract, without the need to resort to expensive litigation.

Opening up the market

Prior to the coronavirus lockdown, there was significant pressure on timelines for signing and delivering CPPAs.

Now that a lot of CPPA projects have been put on hold, there is more flexibility for projects to be negotiated under different subsidy regimes, such as feed-in tariffs (FiTs) and contracts for difference (CfDs), or their equivalent in other jurisdictions.

Similarly, auctions (many of which were oversubscribed) and tender deadlines have been frozen or pushed back, giving participants more time to consider their options.

Applying the brakes to the frenzied pace of Europe’s renewable energy market may have a beneficial impact on the CPPA sector in the long term, if it redresses some of the sharper imbalances in bargaining power.

What next for the CPPA market?

The drop in energy prices and uncertainty about near-term industrial energy demand has brought a very sudden halt to many CPPA negotiations.

On the developer and financing side, there is reluctance to sign CPPAs while energy prices are at current levels, so most discussions have been postponed until there is a clearer view of when and to what extent industry will start up again.

On the corporate side, companies are unwilling to commit to volumes until they know what they will require once economies begin to emerge from the shutdown.

However, the coronavirus pandemic has given the still largely immature CPPA market a chance to pause and reflect on its direction of travel, and what emerges may be a more sophisticated sector than it was pre-crisis.

What seems certain is that demand for low-cost renewable energy will survive the coronavirus outbreak, as corporate sourcing of renewable electricity is going to be an essential part of the transition to a low-carbon society.

This article was authored by Daniel Marhewka, Lis Blunsdon and David Haverbeke, energy specialists at European law firm, Fieldfisher. The comments reflect discussions held during a series of webinars around the launch of Fieldfisher’s thought leadership report “Think GIG: The rise of corporate PPAs“.

The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.