Light after lockdown in Europe’s corporate PPA market

Share

Europe’s coronavirus lockdown has had a chilling effect on many corporate PPA (CPPA) negotiations, as practical difficulties and economic uncertainty slowed the pace of deal discussions.

By the end of April, six-to-eight weeks into the lockdown for most European countries, some positive signs were starting to emerge, both for the reopening of European industry and the resumption of CPPA discussions – particularly in the Netherlands, Spain, Portugal and the United Kingdom.

While pricing decisions for CPPAs with relatively near-term delivery dates are still a sticking point, longer-term projects, which are not due to start construction for at least two years, have been largely unaffected by the lockdown.

Many corporate power buyers have indicated their intention to proceed with negotiations that commenced prior to the lockdown as part of long-term plans to cut carbon emissions, while others have made inquiries about future CPPA opportunities, and most long-term tenders are still going ahead

For some existing and imminent CPPAs, there are still questions about the enforceability of contracts pending resolution by lawyers and arbitrators.

A collapse in demand has left many corporates reluctant to take and pay for contracted energy volumes they no longer need, while in other cases, delivery dates are likely to be missed by generators due to the logistical effects of the lockdown on construction.

However, as things stand, it seems that many parties are trying to take practical measures to resolve these issues and avoid contractual disputes.

What damages are available for COD delays in financial CPPAs?

Whether or not delays in achieving the stated commercial operation date (COD) for power generation projects give rise to claims for losses tends to be one of the most heavily negotiated aspects of CPPA contracts, even without the disruption of a global pandemic.

This issue can arise in respect of hedged volumes, where the offtaker has hedged a proportion of the power volume they expect to receive from the generator. If the generator is late supplying the energy, the offtaker may expect to be compensated for losses on those hedges.

The outcome of these negotiations usually depends on the relative bargaining power and financial bandwidth of the parties involved in the CPPA.

Where the generating asset is relatively small, the supplier is unlikely to have the resources to cover the offtaker’s losses. With larger projects, it is possible to come to an arrangement to cover some of the losses caused by a COD delay, however very few projects can sustain a full typical hedging loss.

In the current context, the focus of many ongoing CPPA negotiations facing COD delays seems to be on mitigation of losses.

Most CPPA deals will only proceed where a contractual risk-sharing balance acceptable to both parties has been agreed, and market feedback suggests that adapted liability and damages thresholds are being honored where delays have clearly been caused by coronavirus.

Corporates seeking additionality (i.e., financial support from the EU earmarked for beneficial projects that would not have gone ahead without the corporate’s involvement) will have come to some sort of risk-sharing arrangement to be able to say that additionality principles have been met.

As these are not simply financial transactions, but projects which claim to offer wider benefits, it is harder to argue that losses have been sustained as a consequence of COD delays.

Has there been any product innovation in CPPAs as a result of the coronavirus crisis?

It is still too early to say whether the unprecedented circumstances of the coronavirus lockdown has led to any meaningful innovation in CPPAs.

So far, the most likely result is more comprehensive variation clauses being written into contracts, including specific pandemic clauses which attempt to cater for the impact of future infection control measures on the scale of those witnessed in Europe in the past two months.

Generally speaking, standard force majeure clauses will not automatically cover the effects of coronavirus on CPPAs, and these clauses are likely to have been a starting point for more complex negotiations about contractual obligations.

Prior to coronavirus, the main innovation had been the rise of aggregating parties.

Aggregators, which take on bundles of renewable power generation and manage related risks, were starting to assume increasingly prominent roles in the CPPA market, although corporate reluctance to extend their energy supply chains had curtailed aggregator involvement to some extent.

It remains to be seen how these aggregators weather the coronavirus storm, but it may be that opportunities to outsource risk will look more attractive to some corporates after the crisis.

Has the coronavirus crisis increased demand for energy storage in Europe’s CPPA market?

Battery storage is very useful when it comes to dealing with intermittency of renewable energy generation.

During the coronavirus lockdown, when supply far exceeded demand and caused energy prices to plummet into negative territory, the desirability of technologies capable of holding onto surplus power became even more apparent.

Increasing criticism of constraint payments, where wind farms are effectively paid to switch off their turbines to prevent energy grids being overloaded, is also adding pressure to find a solution to smoothing out peaks and troughs in supply.

The two main barriers for battery storage are: first, that the cost of batteries is still very high; and second, regulatory regimes generally have not caught up with the role batteries can play in power markets or how they should be treated in law.

In both cases, it is likely to be just a matter of time until these barriers are reduced and ultimately removed.

Some projects are starting to combine energy generation with battery storage and it will be interesting to see how these models fare in the market. In addition to batteries, there has been recent interest in the role hydrogen could potentially play in energy storage.

With the development of large offshore wind farms, price volatility is likely to increase and with it negative pricing at times of low demand.

Anything that can divert energy from the grid and store it in a way that keeps its value and helps provide pricing certainty to the market is going to be very important for renewables in general and for CPPAs.

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